Question

Goodwin Technologies 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 $2.2500 dividend at that time and believes that the dividend will grow by 11.70% for the following two years. However, after the fifth year, she expects Goodwin's dividend to grow at a constant rate of 3.60% per year. Good win's required return is 12.00%.
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, carry the dividend value to four decimal places.
Horizon value:
Current Intrinsic value:
Assuming that the markets are in equilibrium, Goodwin's current expected dividend yield is _, and Goodwin's capital gains yield is _.
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?
No or yes

Answer 1

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