Turbo Technology Computers is experiencing a period of rapid growth. Earnings an

Question

Turbo Technology Computers is experiencing a period of rapid growth. Earnings and dividends are expected to grow at a rate of 15% during the next two years, at 13% in the third year, and at a constant rate of 6% thereafter. Turbo's last dividend was $1.15, and the required rate of return on the stock is 12%.

Complete the following calculations:

Calculate the value of the stock today.

Calculate P1^ and P2^.

Calculate the dividend yield and capital gains yield for Years 1, 2, and 3.

Assignment 3-1, Question 1 1a. Calculate the value of the stock today: 1. Calculate the PV of the dividends paid during the supernatural growth period: $ % $ D1= 1.15 x 1.15 = 1.3225 D2= x = D3= x = PV of Dividends =                        +                        +                        = $ 2. Find the PV of Turbo's stock price at the end of Year 3: P3^ = ____D4____ = __   _D3(1+g)______ rs-g rs-g =                                      = PV of P3^ =                              = $ 3. Sum the two components to find the value of the stock today: Value of current stock (P0)   = $ + $ = $ 1b. Calculate P1^ and P2^. P1^ = $                    + $                    + $                    = $ P2^ = $                    + $                    = $ 1c. Calculate the dividend yields and capital gains yield for Years 1, 2, and 3. Year Dividend Yield + Capital Gains Yield = Total Return 1 $1.3225/$25.23 5.24% + ($26.93 - $25.23) / $25.23 6.74% 12% 2 + 3 +

Explanation / Answer

D1 = D0 x (1 + g) = 1.15 x (1 + 15%) = 1.3225

D2 = D1 x (1 + g) = 1.15 x (1 + 15%) = 1.5209

D3 = D2 x (1 + g) = 1.5209 x (1 + 13%) = 1.7186

D4 = 1.7186 x (1 + 6%) = 1.8217

P3 = D4 / (r - g) = 1.8217 / (12% - 6%) = $30.36

PV of P3 = P3 / (1 + r)^3 = 30.36 / (1 + 12%)^3 = $21.61

P0 = D1 / (1 + r)^2 + D2 / (1 + r)^2 + D3 / (1 + r)^3 + PV of P3

= 1.3225 / 1.12 + 1.5209 / 1.12^2 + 1.7186 / 1.12^3 + 21.61 = $25.23

P1 = D2 / (1 + r) + (D3 + P3) / (1 + r)^2 = 1.5209/1.12 + (1.7186 + 30.36) / 1.12^2 = $26.93

P2 = (D3 + P3) / (1 + r) = (1.7186 + 30.36) / 1.12 = $28.64

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.