Question

Stocks that don't pay dividends yet

Answer 1

Answer:

horizon value at year 5 = $94.3444

current intrinsic intrinsic value P₀ = $47.73

Assuming that the markets are in equilibrium, Goodwin's current expected dividend yield is and Goodwin's capital gains yield is 0(it pays no dividends).

Goodwin has been very successful, but it hasn't paid a dividend yet. It circulates a report to its key investors containing the following statement:

Goodwin's investment opportunities are poor.

Is this statement a possible explanation for why the firm hasn't paid a dividend yet?

B. False

Generally companies that are experiencing a rapid growth do not pay dividends, because they need all the cash that they can use to finance their expansion. Sometimes mature companies that have a steady growth rate will also choose not to pay dividends because they consider themselves as solid investments and not paying dividends allows them to grow more and should increase stockholders' wealth more.

Explanation:

D₃ = $5.50

D₄ = $7.073

D₅ = $9.096

D₆ = $9.642 (and a constant growth rate of 4.38%

Re = 14.60%

horizon value at year 5 = $9.642 / (14.6% - 4.38%) = $94.3444

intrinsic value P₀ = $94.3444 / 1.146⁵ = $47.73