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NONCONSTANT GROWTH Assume that it is now january 1, 2019. 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 (D 3 ), which was paid yesterday, was $1.75 per share. a. Calculate WME’s expected dividends for 2019, 2020, 2021, 2022, and 2023. b. Calculate the value of the stock today p ^ o . Proceed by finding the present value of the dividends expected at the end of 2019, 2020, 2021, 2022, and 2023. The year end 2023stock price can be found by using the constant growth equation. Notice that to find the December 31, 2023, price, you must use the dividend expected in 2024, which is 5% greater than the 2023 dividend. c. Calculate the expected dividend yield (D i /P o ), capital gains yield, and total return (dividend yield plus capital gains yield) expected for 2019. (assume that p ^ a = P o and recognize that the capital gains yield is equal to the total return minus the dividend yield.) =Then calculate these same three yields for 2024. d. How might an investor’ tax situation affect his or her decision to purchase stocks os companies in the early stages of their lives, when they are growing rapidly, versus stocks of older, more mature firms? When does WME’s become "mature" for purposes of this questions? 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 growthrate 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 tells you that the 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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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781337395250
BuyFind

Fundamentals of Financial Manageme...

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

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Chapter
Section
Chapter 9, Problem 21P
Textbook Problem

NONCONSTANT GROWTH Assume that it is now january 1, 2019. 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 (D3), which was paid yesterday, was $1.75 per share.

  1. a. Calculate WME’s expected dividends for 2019, 2020, 2021, 2022, and 2023.
  2. b. Calculate the value of the stock today p ^ o. Proceed by finding the present value of the dividends expected at the end of 2019, 2020, 2021, 2022, and 2023. The year end 2023stock price can be found by using the constant growth equation. Notice that to find the December 31, 2023, price, you must use the dividend expected in 2024, which is 5% greater than the 2023 dividend.
  3. c. Calculate the expected dividend yield (Di/Po), capital gains yield, and total return (dividend yield plus capital gains yield) expected for 2019. (assume that p ^ a = Po and recognize that the capital gains yield is equal to the total return minus the dividend yield.) =Then calculate these same three yields for 2024.
  4. d. How might an investor’ tax situation affect his or her decision to purchase stocks os companies in the early stages of their lives, when they are growing rapidly, versus stocks of older, more mature firms? When does WME’s become "mature" for purposes of this questions?
  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 growthrate 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 tells you that the 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

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