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FinanceFundamentals of Financial Management (MindTap Course List)15th Edition

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Chapter 9, Problem 18P
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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

Solutions

Chapter
Section
Problem 1Q
Problem 2Q
Problem 3Q
Problem 4Q
Problem 5Q
Problem 6Q
Problem 7Q
Problem 8Q
Problem 1P
Problem 2P
Problem 3P
Problem 4P
Problem 5P
Problem 6P
Problem 7P
Problem 8P
Problem 9P
Problem 10P
Problem 11P
Problem 12P
Problem 13P
Problem 14P
Problem 15P
Problem 16P
Problem 17P
Problem 18P
Problem 19P
Problem 20P
Problem 21P
Problem 22SP
Problem 23IC
Problem 1TCL
Problem 2TCL
Problem 3TCL
Problem 4TCL
Problem 5TCL
Problem 6TCL
Problem 7TCL
Problem 8TCL
Problem 9TCL
Problem 10TCL
BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

NONCONSTANT GROWTH STOCK VALUATION Taussig Technologies Corporation (TTC) has been growing at a rate of 20% per year in recent years. This same growth rate is expected to last for another 2 years, then decline to gn =6%.

  1. a. If D0 = $1.60 and rs = 10%, what is TIC’s stock worth today? What are its expected dividend, and capital gains yields at this time, that is, during Year 1?
  2. b. Now assume that ITC’s period of supernormal growth is to last for 5 years rather than 2 years. Flow would this affect the price, dividend yield, and capital gains yield? Answer in words only.
  3. c. What will TTC’s dividend and capital gains yields be once its period of supernormal growth ends? (Hint: These values will be the same regardless of whether you examine the case of 2 or 5 years of supernormal growth; the calculations are very easy.)
  4. d. Explain why investors are interested in the changing relationship between dividend and capital gains yields over time.

a.

Summary Introduction

To identify: The stock value, expected dividend and capital gain.

Introduction:

Corporate Value Model: The model that evaluates a firm on the basis of its future operations and the results of those operations is called corporate valuation model. It is a useful tool to analyze a firm’s stock for investment purposes.

Explanation

Formula to calculate the present value of share,

P0=Div1(1+r)1+Div2(1+r)2+...+Divn+Horizon value(1+r)n

Where,

  • P0 is the stock value.
  • Div1 is the dividend for the first year.
  • Div2 is the dividend for the second year.
  • Divn is the dividend for the third year.
  • n is the number of years.
  • r is the interest rate.

Substitute $1.92 for Div1 , $2.30 for Div2 , and $60.95 for stock value.

P0=$1.92(1+0.10)1+$2.30(1+0.10)2+$60.95(1+0.10)2=$1.921.10+$2.301.21+$60.951.21=$1.75+$1.90+$50.37=$54.022

The stock value is $54.022.

Compute the expected dividend yield.

The dividend for the first year is $1.92. (Calculated in working note)

The stock value is $54.022. (Calculated above)

Formula to calculate the expected dividend yield,

Expected dividend yield=Div1P0

Where,

  • P0 is the stock value.
  • Div1 is the dividend for the first year.

Substitute $1.92 for Div1 and $54.022 for P0

Expected dividend yield=$1.92$54.022=0.036

The expected dividend yield is 0.036 or 3.6%.

Compute the capital gain yield.

In order to compute the capital gain yield, price at the first year needs to calculate.

The rate of return is 10% or 0.10. (Given)

The dividend of the second year is $2.30. (Calculated in working note)

The stock value of the second year is $60.95. (Calculated in working note)

Formula to calculate the stock value of the first year,

P1=(Div2+P2)(1+r)

Where,

  • P1 is the stock value of first year

b.

Summary Introduction

To identify: The affect of reduction in maturity period on price, dividend yield and capital gain yield.

c.

Summary Introduction

To identify: The capital gain yield and dividend yield.

d.

Summary Introduction

To explain: The reason to take the interest of investors in the dividend and capital gain yield change relationship.

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Sect-9.A P-1QSect-9.A P-2QSect-9.A P-1PSect-9.A P-2PSect-9.A P-3PCh-9 P-1QCh-9 P-2QCh-9 P-3QCh-9 P-4QCh-9 P-5Q
Ch-9 P-6QCh-9 P-7QCh-9 P-8QCh-9 P-1PCh-9 P-2PCh-9 P-3PCh-9 P-4PCh-9 P-5PCh-9 P-6PCh-9 P-7PCh-9 P-8PCh-9 P-9PCh-9 P-10PCh-9 P-11PCh-9 P-12PCh-9 P-13PCh-9 P-14PCh-9 P-15PCh-9 P-16PCh-9 P-17PCh-9 P-18PCh-9 P-19PCh-9 P-20PCh-9 P-21PCh-9 P-22SPCh-9 P-23ICCh-9 P-1TCLCh-9 P-2TCLCh-9 P-3TCLCh-9 P-4TCLCh-9 P-5TCLCh-9 P-6TCLCh-9 P-7TCLCh-9 P-8TCLCh-9 P-9TCLCh-9 P-10TCL

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