9. Stocks that don\'t pay dividends yet Goodwin Technologies, a relatively young
ID: 2787831 • Letter: 9
Question
9. Stocks that don't pay dividends yet Goodwin Technologies, a relatively young company, has been wildly successful but has yet to pay a dividend. An analyst forecasts that Goodwin is likely to pay its first dividend three years from now. She expects Goodwin to pay a $1.2500 dividend at that time (D3-$1.2500) and believes that the dividend will grow by 6.50% for the following two years (D4 and Ds). However, after the fifth year, she expects Goodwin's dividend to grow at a constant rate of 3.36% per year. Goodwin's required return is 11.20%. Fill in the following chart to determine Goodwin's horizon value at the horizon date-when constant growth begins-and the current intrinsic value. To increase the accuracy of your calculations, carry the dividend values to four decimal places. Term Value Horizon value Current Intrinsic value7 Assuming that the markets are in equilibrium, Goodwin's current expected dividend yield is Goodwin's capital gains yield is ,and Goodwin has been very successful, but it hasn't paid a dividend yet. It circulates a report to its key investors containing the following statement Goodwin's investment opportunities are poorExplanation / Answer
Intrinsic Value or Fair value=1.25/1.112^3+1.25*1.065/1.112^4+1.25*1.065^2/1.112^5+Horizon Value/1.112^5
Horizon Value=D6/(required return-terminal growth rate)=1.25*1.065^2*1.0336/(11.2%-3.36%)=$18.69157
Hence, Intrinsic Value or Fair value=1.25/1.112^3+1.25*1.065/1.112^4+1.25*1.065^2/1.112^5+18.69157/1.112^5=$13.6067
Dividend yield=0 as the company is not paying dividends
Capital gains yield=required return-dividend yield=11.2%-0%=11.2%
The statement is false because if opportunities are poor rather than keeping cash it will pay out in the form of dividends
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