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7 Jun 2019

A stock with a constant dividend growth rate of 5% is expected to make a $2 dividend in one year. If you require a 12% return on your investment, which of the following statements is INCORRECT?Note: P0 = D1/(R–g) or R = (D1/P0) + g.

A. The current stock price is $28.57. B. The dividend yield is 7%. C. The capital gains yield is 12%. D. The stock price will grow at an annual 5%.

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Deanna Hettinger
Deanna HettingerLv2
9 Jun 2019

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Nonconstant growth

Assume that it is now January 1, 2013. Wayne-Martin Electric Inc. (WME) has just developed a solar panel capable of generating 200% more electricity than any other solar panel currently on the market. As a result, WME is expected to experience a 15% annual growth rate for the next 5 years. Other firms will have developed comparable technology at the end of 5 years, and WME's growth rate will slow to 5% per year indefinitely. Stockholders require a return of 12% on WME's stock. The most recent annual dividend (D0), which was paid yesterday, was $1.75 per share.

  1. Calculate WME's expected dividends for 2013, 2014, 2015, 2016 and 2017. Round your answers to the nearest cent.

    D2012 = $ 2.01
    D2013 = $ 2.31
    D2014 = $ 2.66
    D2015 = $ 3.06
    D2016 = $ 3.52
  2. Calculate the value of the stock today, . Proceed by finding the present value of the dividends expected at the end of 2013, 2014, 2015, 2016 and 2017 plus the present value of the stock price that should exist at the end of 2017. The year-end 2017 stock price can be found by using the constant growth equation. Notice that to find the December 31, 2017, price, you must use the dividend expected in 2018, which is 5% greater than the 2017 dividend.
    Round your answer to the nearest cent.
    $
  3. Calculate the expected dividend yield (D1/P0), capital gains yield, and total return (dividend yield plus capital gains yield) expected for 2013. (Assume that ?? and recognize that the capital gains yield is equal to the total return minus the dividend yield.) Round your answers to two decimal places.

    D1/P0 = %
    Capital gains yield = %
    Expected total return = %

    Then calculate these same three yields for 2018. Round your answers to two decimal places.

    D6/P5 = %
    Capital gains yield = %
    Expected total return = %

Nonconstant growth

Assume that it is now January 1, 2013. Wayne-Martin Electric Inc. (WME) has just developed a solar panel capable of generating 200% more electricity than any other solar panel currently on the market. As a result, WME is expected to experience a 15% annual growth rate for the next 5 years. Other firms will have developed comparable technology at the end of 5 years, and WME's growth rate will slow to 5% per year indefinitely. Stockholders require a return of 12% on WME's stock. The most recent annual dividend (D0), which was paid yesterday, was $1.75 per share.

  1. Calculate WME's expected dividends for 2013, 2014, 2015, 2016 and 2017. Round your answers to the nearest cent.

    D2012 = $ 2.01
    D2013 = $ 2.31
    D2014 = $ 2.66
    D2015 = $ 3.06
    D2016 = $ 3.52
  2. Calculate the value of the stock today, . Proceed by finding the present value of the dividends expected at the end of 2013, 2014, 2015, 2016 and 2017 plus the present value of the stock price that should exist at the end of 2017. The year-end 2017 stock price can be found by using the constant growth equation. Notice that to find the December 31, 2017, price, you must use the dividend expected in 2018, which is 5% greater than the 2017 dividend.
    Round your answer to the nearest cent.
    $
  3. Calculate the expected dividend yield (D1/P0), capital gains yield, and total return (dividend yield plus capital gains yield) expected for 2013. (Assume that ?? and recognize that the capital gains yield is equal to the total return minus the dividend yield.) Round your answers to two decimal places.

    D1/P0 = %
    Capital gains yield = %
    Expected total return = %

    Then calculate these same three yields for 2018. Round your answers to two decimal places.

    D6/P5 = %
    Capital gains yield = %
    Expected total return = %

Problem 7-20 Nonconstant Growth Stock Valuation Reizenstein Technologies (RT) has just developed a solar panel capable of generating 200% more electricity than any solar panel currently on the market. As a result, RT is expected to experience a 19% annual growth rate for the next 5 years. By the end of 5 years, other firms will have developed comparable technology, and RT's growth rate will slow to 7% per year indefinitely. Stockholders require a return of 10% on RT's stock. The most recent annual dividend (D0), which was paid yesterday, was $2.65 per share.

Calculate the expected dividend yield (D1/ ), the capital gains yield expected during the first year, and the expected total return (dividend yield plus capital gains yield) during the first year. (Assume that = P0, and recognize that the capital gains yield is equal to the total return minus the dividend yield.). Round your answers to two decimal places. Do not round your intermediate computations.

Expected dividend yield %

Capital gains yield %

Expected total return %

Also calculate these same three yields for t = 5 (e.g., D6/ ). Round your answers to two decimal places. Do not round your intermediate computations. Expected dividend yield % Capital gains yield % Expected total return %

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