Goodwin Technologies, a relatively young company, has been wildly successful but

Question

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 $1.5000 dividend at that time (D3-$1.5000) and believes that the dividend will grow by 7.80% 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 3.42% per year. Goodwin's required return is 11.40%. Fill in the following chart to determine Goodwin's horizon value at the horizor 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 value 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 has a large selection of profitable investment opportunities. Is this statement a possible explanation for why the firm hasn't paid a dividend yet? O Yes O No

Explanation / Answer

Horzon value = 22.59

intrinsic value = 16.32

current div yield = 0%

capital gain yield = 11.40%

True

Discount rate 11.4000% Cash flows Year Discounted CF= cash flows/(1+rate)^year Cumulative cash flow                                -   0                                            -                                           -                                  -   1                                            -                                           -                                  -   2                                            -                                           -                           1.500 3                                        1.09                                    1.09                         1.617 4                                        1.05                                    2.13                         1.743 5                                        1.02                                    3.15                      22.591 5                                     13.17                                  16.32

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