Use the following information to answer the next three questions: Wayne-Martin E

Question

Use the following information to answer the next three questions:

Wayne-Martin Electric Inc. (WME) has just developed a solar panel capable of generating 200 percent more electricity than any solar panel currently on the market. As a result, WME is expected to experience a 15 percent annual growth rate for the next 5 years. By the end of 5 years, other firms will have developed comparable technology, and WME's growth rate will slow to 5 percent per year indefinitely. Stockholders require a return of 12 percent on WME's stock. The most recent annual dividend, which was paid yesterday, was $1.75 per share.

Int. Rate 12% YR 0 YR 1 YR 2 YR 3 YR 4 YR 5 YR 6 Growth Rate 15% 15% 15% 15% 15% 5% Dividend 1.75 2.0125 2.314375 2.661531 3.06076 3.519875 3.695868 Price at Yr 5 52.79813 Cash Flows 2.0125 2.314375 2.661531 3.06076 56.318 a. Use the NPV function to calculate the current stock price. 1.05 Price = b. Use the NPV function to calculate the expected stock price in years 1-4. Price = c. What dividend yield and capital gains yield should an investor expect each year? (Example: For year 0 yield, you buy the stock at year zero, receive the dividend at year 1 and sell the stock at year 1.) YR 0 YR 1 YR 2 YR 3 YR 4 YR 5 Dividend Yld Cap Gains Yld Total Yield

Explanation / Answer

NPV formula:
=NPV(0.12,I10:L10) where I10 to L10 are the cash flows

YR 0 YR 1 YR 2 YR 3 YR 4 YR 5 YR 6 Growth Rate 15% 15% 15% 15% 15% 5% Dividend 1.75 2.0125 2.314375 2.661531 3.06076 3.519875 3.695868 3.8806614 Price at Yr 5 52.79813 55.43802 Cash Flows 2.0125 2.314375 2.661531 3.06076 56.318 59.133888 a. Use the NPV function to calculate the current stock price. 1.05 Price = $   39.44 b. Use the NPV function to calculate the expected stock price in years 1-4. Year 1 2 3 4 5 Price = $   42.16 $   44.90 $   47.63 $   50.28 52.80 c. What dividend yield and capital gains yield should an investor expect each year? (Example: For year 0 yield, you buy the stock at year zero, receive the dividend at year 1 and sell the stock at year 1.) YR 0 YR 1 YR 2 YR 3 YR 4 YR 5 Dividend Yld 4.44% 4.77% 5.15% 5.59% 6.09% 6.67% Cap Gains Yld 6.90% 6.51% 6.07% 5.57% 5.00% 5.00% Total Yield 11.33% 11.28% 11.23% 11.16% 11.09% 11.67%

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