3. (12 points) Reizenstein Trucking (RT) has just developed a solar panel capabl

Question

3. (12 points) Reizenstein Trucking (RT) has just developed a solar panel capable of generating 200% more electricity than any solar panel currently on the market. This will substantively increase the company's profit in the short-term. As a result, RT is expected to experience a 15% annual growth rate in dividends for the next 5 years (ie, till t-5). By the end of 5 years. other firms will have developed comparable technology, and RT's dividend growth rate will slow to 5% per year indefinitely. Stockholders require a return of 12% on RT's stock. The next dividend will be paid one year from now and it is expected to be $2.0125 per share. (4 points) What are RTs expected future dividends till one year after the firm matures? a. b. (4 points) Calculate the value of the stock today?

Explanation / Answer

D1 = 2.0125

D2 = 2.0125*(1+15%) = 2.3144

D3 = 2.3144 *(1+15%) = 2.6615

D4 = 2.6615*(1+15%) = 3.0608

D5 = 3.0608*(1+15%) = 3.5199

D6 = 3.5199*(1+5%) = 3.6959 (1 year after mature growth)

2)

Price = PV of dividends + PV of terminal value

Terminal value = D6/(r-g) = 3.6959/(12%-5%) = 52.7981

Price

= 2.0125/(1+12%) + 2.3144/(1+12%)2 + 2.6615/(1+12%)3 + 3.0608/(1+12%)4 + 3.5199/(1+12%)5 + 52.7981/(1+12%)5

= 39.4378 = 39.44

3)

Dividend yield = D/P = 2.0125/39.4378 = 5.10%

Price in Year 1 = 2.3144/(1+12%) + 2.6615/(1+12%)2 + 3.0608/(1+12%)3 + 3.5199/(1+12%)4 + 52.7981/(1+12%)4

= 42.1579

Capital gain yield = (42.1579 - 39.4378) / 39.4378 = 6.90%

Realized return = 5.1% + 6.9% = 12%

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