Question

Goodwin Technologies, a relatively young company, has been wildly successful but has yet to pay a dividend. An analyst forecasts that Goodwin is likely to pay its first dividend three years from now. She expects Goodwin to pay a $5.50000 dividend at that time (D₃ = $5.50000) and believes that the dividend will grow by 28.60000% for the following two years (D₄ and D₅). However, after the fifth year, she expects Goodwin’s dividend to grow at a constant rate of 4.38000% per year. Goodwin’s required return is 14.60000%. Fill in the following chart to determine Goodwin’s horizon value at the horizon date (when constant growth begins) and the current intrinsic value. To increase the accuracy of your calculations, do not round your intermediate calculations, but round all final answers to two decimal places.

Answer 1

Answer:

Intrinsic value of the share: 59.35

Explanation:

First we calcualte D4 and D5 and D6

5.5 x 1.286 = D4

then D4 x 1.286 = D5

last D5 x 1.0438 = D6

Then, we solve for the horizon value which is:

D6/(r-g)

being constant grow 0.0438

and r the required return of 14.60%

This give us 92.8989966379648

Last, we discount each concept by the years ahead of time (notice Horizon while it used D6 it is at year 5 because we use a dividend one year ahead of time.

$\frac{Maturity}{(1 + rate)^{time} } = PV$  

Maturity  $5.50

time  3.00

rate  0.14600

$\frac{5.5}{(1 + 0.146)^{3} } = PV$  

PV   3.6543

$\frac{Maturity}{(1 + rate)^{time} } = PV$  

Maturity  $7.07

time  4.00

rate  0.14600

$\frac{7.073}{(1 + 0.146)^{4} } = PV$  

PV   4.1008

$\frac{Maturity}{(1 + rate)^{time} } = PV$  

Maturity  $9.10

time  5.00

rate  0.14600

$\frac{9.095879}{(1 + 0.146)^{5} } = PV$  

PV   4.6017

$\frac{Maturity}{(1 + rate)^{time} } = PV$  

Maturity  $92.90

time  5.00

rate  0.14600

$\frac{92.89899663}{(1 + 0.146)^{5} } = PV$  

PV   46.9989

We add them all aand get the valeu of the share

$\left[\begin{array}{ccc}#&Cashflow&Discounted\\&&\\1&&0\\2&&0\\3&5.5&3.65\\4&7.073&4.1\\5&9.095878&4.6\\5&92.8989966379648&47\\&TOTAL&59.35\\\end{array}\right]$