Goodwin Technologies is a relatively young company. Goodwin has been widely successful, but it has yet to pay a dividend. An analyst has forecasted that Goodwin is likely to pay its first dividend three years from now. She expects Goodwin to pay a $2.50 dividend at that time (D3 - $2.50), and believes the dividend will grow by 30% for the following two years (D4 and D5). However, after five years, she expects Goodwin's dividend to grow at a constant rate of 7% per year.
1) If Goodwin's required return is 12.7%, what is Goodwin's horizon value at the horizon date-- when constant growth begins? (Choices: $76.62, 77.94, 85.30, 86.94, 79.31)
2) What is Goodwin's current intrinsic value? (Choices $55.09, 49.71, 58.85, 53.93, 48.74)
3) What are Goodwin's current expected dividend and capital gains yields?
Expected dividend yield=(choices: 0.00%, 8.40%, 4.80%, 7.20%, 3.60% or 12.70%)
Expected capital gains yield=( Choices: 12.70%, 8.40%, 3.60%, 0.00% or 7.20%)
4) What are Goodwin's expected dividend and capital gains yields in two years--that is, the year before the firm begins paying dividends? (Hint: You are at Year 2, and the first dividend is expected to be paid at the end of the year. Find DY2 and CGY2.)
Expected dividend yield (DY2) = (choices: 3.82%, 3.75%, 3.39%, 3.89% or 3.60%)
Expected capital gains yield (CGY2) = (Choices: 8.80%, 8.62%, 8.74%, 8.68% or 8.51%)
5) Goodwin has been very successful, but it hasn't paid a dividend yet. Which of the following might explain why the firm hasn't paid a dividend? Check all that apply.
a) Investors prefer the deferred tax liability that capital gains offer over dividends.
b) Goodwin's corporate charter prevents them from paying dividends.
c) Goodwin has a large selection of profitable investment opportunities.
d) Goodwin's investment opportunities are poor.
e) Goodwin has yet to record a profit (positive net income).