1. A parent company sells land to its wholly-owned subsidiary in 2015, reporting a gain of $35,000. In 2020, the subsidiary sell
1 answer:
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Answer and Explanation:
The computation is shown below:
Year Cash flow PVF at 12% PV at 12%
D0 0 0 1 0
D1 0 0 0.89286 0
D2 0 0 0.79719 0
D3 2.25 2.25 0.71178 1.601505 (A)
D4 2.25 × 1.117^1 = 2.51325 0.63552 1.597221 (B)
D5 2.25 × 1.117^2 = 2.80730 0.56743 1.592946 (C)
Now
Horizon Value at D5 is
= Next Year Dividend ÷ (Required Rate -Growth rate)
= (2.25 × 1.117^2 × 1.036) ÷ (0.12 - 0.036)
34.6234 34.6234 0.56743 19.64634 (D)
Current Value 24.43801 (A + B + C + D)
Horizon Value = 34.62
Intrinsic Value = 24.43
Now
Current expected dividend yield is
= Dividend ÷ Market Price
= 0 ÷ 24 ÷ 43
= 0 %
And, the minimum expected capital yield should be equivalent to the required rate of return i.e 12%
The company should not paying the dividend because it involves various reasons lime expansion plans, seasonal & cyclical sales, buy back shares
