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

p4 VALUE WILL BE= P3 * growth rate= 28.64*1.06= 30.36

Calculate the PV of the dividends paid during the supernatural growth period: $ % $ PV factor @12% Present value D1= 1.15 x 1.15 = 1.3225 x 0.89285714 = 1.180804 D2= 1.3225 x 1.15 = 1.520875 x 0.79719388 = 1.212432 D3= 1.520875 x 1.13 = 1.718589 x 0.71178025 = 1.223258 PV of dividends 1.1808036 + 1.2124322 + 1.223258 = 3.61649334 PV of Turbo's stock price at the end of Year 3: D4= 1.7185888 x 1.06 = 1.821704 P3= D4/(rs-g) rs= 12% g= 6% P3= 1.821704075/(0.12-0.06) P3= 30.361735 PV of P3= 30.361735 x 0.7117802 = 21.61088 Sum the two components to find the value of the stock today: Value of current stock (P0) = 3.6164933 + 21.61088 = 25.2273763 P1= 30.361735 + 1.7185888 + 1.520875 (1+0.12)^2 (1+0.12)^2 (1+0.12) 30.361735 + 1.7185888 + 1.520875 1.2544 1.2544 1.12 24.204189 + 1.3700484 + 1.357924 = 26.9321615 P2= 30.361735 + 1.7185888 (1+0.12) (1+0.12) 30.361735 + 1.7185888 1.12 1.12 27.108692 + 1.5344542 = 28.64315 30.36173 dividend yields and capital gains yield Year Dividend yield Capital gain yield 1 1.3225 = 5.24% + 26.93-25.23 / 25.23 = 6.74% = 11.98% 25.227376 2 1.520875 = 5.65% + 28.64-26.93 / 26.93 = 6.35% = 12.00% 26.932161 3 1.7185888 = 6.00% + 30.36-28.64 / 28.64 = 6.01% = 12.01% 28.643146

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

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