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 g_n =6%.

1. a. If D₀ = $1.60 and r_s = 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.