Goodwin Technologies is a relatively young company. Goodwin has been wildly succ

Question

Goodwin Technologies is a relatively young company. Goodwin has been wildly successful, but it has yet to pay a dividend. An analyst has forecasted that Goodwin is likely to pay its first dividend three years from now. She expects Goodwin to pay a $2.50 dividend at that time (D3-$2.50), and believes the dividend will grow by 30% for the following two years (D4 and D5). However, after five years, she expects Goodwin's dividend to grow at a constant rate of 796 per year. If Goodwin's required return is 12.7%, what is Goodwin's horizon value at the horizon date-when constant growth begins? O $77.94 O $85.30 O $79.31 O $92.26 O $76.62 What is Goodwin's current intrinsic value? O $55.09 O $56.29 O $47.81 : $53.93 O $49.71 What are Goodwin's current expected dividend and capital gains yields? Expected dividend yield (DYo) Expected capital gains yield (CGYo) What are Goodwin's expected dividend and capital gains yields in two years-that is, the year before the firm begins paying dividends? (Hint: You are at Year 2, and the first dividend is expected to be paid at the end of the year. Find DY2 and CGY2.) Expected dividend yield (DY2) Expected capital gains yield (CGY2) - Goodwin has been very successful, but it hasn't paid a dividend yet. Which of the following might explain why the firm hasn't paid a dividend? Investors prefer the deferred tax liability that capital gains offer over dividends Goodwin has yet to record a profit (positive net income)

Explanation / Answer

D3=2.5
D4=2.5*1.3=3.25
D5=3.25*1.3=4.225
D6=4.225*1.07=4.52075

Horizon Value=D6/(r-g)=4.52075/(12.7%-7%)=79.3114

Current Intrinsic Value=2.5/1.127^3+3.25/1.127^4+4.225/1.127^5+Horizon Value/1.127^5
=2.5/1.127^3+3.25/1.127^4+4.225/1.127^5+79.3114/1.127^5
=49.70799

Expected DIvidend Yield=0
Expected Capital Gains yield=12.7%-0=12.7%

P2=2.5/1.127+3.25/1.127^2+4.225/1.127^3+79.3114/1.127^3=63.13556
Expected Dividend Yield DY2=D3/P2=2.5/63.13556=3.9597%
So, expected capital gains yield CGY2=12.7%-3.9597%=8.7403%

Goodwin has yet to record a profit explains why the firm hasnt paid a dividend yet

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