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NONCONSTANT GROWTH Assume that it is now January 1, 2017. Wayne-Martin Electric Inc. (WME) has 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 by 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 which was paid yesterday, was $1.75 per share. a. Calculate WME’s expected dividends for 2017, 2018, 2019, 2020, and 2021. b. Calculate the value of the stock today, P ^ 0 . Proceed by finding the present value of the dividends expected at the end of 2017, 2018, 2019, 2020, and 2021 plus the present value of the stock price that should exist at the end of 2021. The year end 2021 stock price can be found by using the constant growth equation. Notice that to find the December 31, 2021, price, you must use the dividend expected in 2022, which is 5% greater than the 2021 dividend. c. Calculate the expected dividend yield (D 1 /P 0 ), capital gains yield, and total return (dividend yield plus capital gains yield) expected for 2017. (Assume that P ^ 0 =P 0 and recognize that the capital gains yield is equal to the total return minus the dividend yield.) Then calculate these same three yields for 2022. d. How might an investor’s tax situation affect his or her decision to purchase stocks of companies in the early stages of their lives, when they are growing rapidly, versus stocks of older, more mature firms? When does WME’s stock become “mature” for purposes of this question? e. Suppose your boss tells you she believes that WME’s annual growth rate will be only 12% during the next 5 years and that the firm’s long-run growth rate will be only 4%. Without doing any calculations, what general effect would these growth rate changes have on the price of WME’s stock? f. Suppose your boss also tells you that she regards WME as being quite risky and that she believes the required rate of return should be 14%, not 12%. Without doing any calculations, determine how the higher required rate of return would affect the price of the stock, the capital gains yield, and the dividend yield. Again, assume that the long-run growth rate is 4%.

BuyFind

Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781305635937
BuyFind

Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781305635937

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Chapter
Section
Chapter 9, Problem 21P
Textbook Problem

NONCONSTANT GROWTH Assume that it is now January 1, 2017. Wayne-Martin Electric Inc. (WME) has 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 by 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 which was paid yesterday, was $1.75 per share.

  1. a. Calculate WME’s expected dividends for 2017, 2018, 2019, 2020, and 2021.
  2. b. Calculate the value of the stock today, P ^ 0 . Proceed by finding the present value of the dividends expected at the end of 2017, 2018, 2019, 2020, and 2021 plus the present value of the stock price that should exist at the end of 2021. The year end 2021 stock price can be found by using the constant growth equation. Notice that to find the December 31, 2021, price, you must use the dividend expected in 2022, which is 5% greater than the 2021 dividend.
  3. c. Calculate the expected dividend yield (D1/P0), capital gains yield, and total return (dividend yield plus capital gains yield) expected for 2017. (Assume that P ^ 0 =P 0 and recognize that the capital gains yield is equal to the total return minus the dividend yield.) Then calculate these same three yields for 2022.
  4. d. How might an investor’s tax situation affect his or her decision to purchase stocks of companies in the early stages of their lives, when they are growing rapidly, versus stocks of older, more mature firms? When does WME’s stock become “mature” for purposes of this question?
  5. e. Suppose your boss tells you she believes that WME’s annual growth rate will be only 12% during the next 5 years and that the firm’s long-run growth rate will be only 4%. Without doing any calculations, what general effect would these growth rate changes have on the price of WME’s stock?
  6. f. Suppose your boss also tells you that she regards WME as being quite risky and that she believes the required rate of return should be 14%, not 12%. Without doing any calculations, determine how the higher required rate of return would affect the price of the stock, the capital gains yield, and the dividend yield. Again, assume that the long-run growth rate is 4%.

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Chapter 9 Solutions

Fundamentals of Financial Management, Concise Edition (MindTap Course List)
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Ch. 9 - Discuss the similarities and differences between...Ch. 9 - This chapter discusses the discounted dividend and...Ch. 9 - DPS CALCULATION Weston Corporation just paid a...Ch. 9 - CONSTANT GROWTH VALUATION Tresnan Brothers is...Ch. 9 - CONSTANT GROWTH VALUATION Holtzman Clothierss...Ch. 9 - NONCONSTANT GROWTH VALUATION Holt Enterprises...Ch. 9 - CORPORATE VALUATION Scampini Technologies is...Ch. 9 - PREFERRED STOCK VALUATION Farley Inc. has...Ch. 9 - PREFERRED STOCK RATE OF RETURN What will be the...Ch. 9 - PREFERRED STOCK VALUATION Earley Corporation...Ch. 9 - PREFERRED STOCK RETURNS Avondale Aeronautics has...Ch. 9 - VALUATION OF A DECLINING GROWTH STOCK Maxwell...Ch. 9 - Suppose you believe that the economy is just...Ch. 9 - VALUATION OF A CONSTANT GROWTH STOCK Investors...Ch. 9 - CONSTANT GROWTH You are considering an investment...Ch. 9 - NONCONSTANT GROWTH Computech Corporation is...Ch. 9 - CORPORATE VALUATION Dantzler Corporation is a...Ch. 9 - NONCONSTANT GROWTH Carnes Cosmetics Co.s stock...Ch. 9 - CONSTANT GROWTH Your broker offers to sell you...Ch. 9 - NONCONSTANT GROWTH STOCK VALUATION Taussig...Ch. 9 - CORPORATE VALUATION Brandtly Industries invests a...Ch. 9 - CORPORATE VALUE MODEL Assume that today is...Ch. 9 - NONCONSTANT GROWTH Assume that it is now January...Ch. 9 - Comprehensive/Spreadsheet Problem NONCONSTANT...Ch. 9 - STOCK VALUATION Robert Balik and Carol Kiefer are...Ch. 9 - For purposes of this exercise, lets take a closer...Ch. 9 - Check recent headlines on the website to see the...Ch. 9 - To provide a starting point for gauging a companys...Ch. 9 - To put XOMs P/E ratio in perspective, it is useful...Ch. 9 - To put the firms current P/E ratio in perspective,...Ch. 9 - In the text, we discussed using the discounted...Ch. 9 - The required return on equity, rs, is the final...Ch. 9 - It is often useful to perform a sensitivity...Ch. 9 - Until now, we have assumed that XOMs dividend will...Ch. 9 - Finally, you can also use the information on the...

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