Wayne-Martin Electric Inc. (WME) has just developed a solar panel capable of generating 200 percent more electricity than any solar panel currently on the market. As a result, WME is expected to experience a 15 percent annual growth rate for the next 5 years. By the end of 5 years, other firms will have developed comparable technology, and WME's growth rate will slow to 5 percent per year indefinitely. Stockholders require a return of 12 percent on WME's stock. The most recent annual dividend (D0), which was paid yesterday, was $1.75 per share.
a. Calculate WME's expected dividends for t = 1, t = 2, t = 3, t = 4, and t = 5.
b. Calculate the value of the stock today, ˆP0. Proceed by finding the present value of the dividends expected at t = 1, t = 2, t = 3, t = 4, and t = 5 plus the present value of the stock price which should exist at t = 5, P5. The ˆP5 stock price can be found by using the constant growth equation. Notice that to find P5, you use the dividend expected at t = 6, which is 5 percent greater than the t = 5 dividend.
c. Calculate the expected dividend yield, D1/P0, the capital gains yield expected during the first year, and the expected total return (dividend yield plus capital gains yield) during the first year. (Assume that ˆP0 = P0, and recognize that the capital gains yield is equal to the total return minus the dividend yield.) Also calculate these same three yields for t = 5 (e.g., D6/P5).