Solution A Fall B C D E F G H I Chapter Ch P Build a Model

Solution A Fall B C D E F G H I Chapter Ch

C D E F G H I Chapter Ch P Build a Model Rework Problem Taussig Technologies

Solution A Fall B C D E F G H I

Chapter Ch P Build a Model Rework Problem Taussig Technologies

Solution A Fall B C D E F

Solution A Fall B

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Paper instructions

Pls help with attachedFall 2, 2012
7/22/2012
Chapter 7.
Ch 07 P20 Build a Model
Except for charts and answers that must be written, only Excel formulas that use cell references or functions will be accepted for credit.
Numeric answers in cells will not be accepted.
1.
Find the price today.
$1.60
10.0%
20%
Short-run g; for Years 1-2 only.
5%
Long-run g; for Year 3 and all following years.
20%
5%
Year
0
1
2
3
Dividend
PV of dividends
2.
Find the expected dividend yield.
Dividend yield =
/
Dividend yield =
/
Dividend yield =
3.
Find the expected capital gains yield.
The capital gains yield can be calculated by simply subtracting the dividend yield from the total expected return.
Cap. Gain yield=
Expected return
–
Dividend yield
Cap. Gain yield=
–
Cap. Gain yield=
=
+
=
+
=
Cap. Gain yield=
/
Cap. Gain yield=
/
Cap. Gain yield=
1. Find the price today.
$1.60
10.0%
20%
Short-run g; for Years 1-5 only.
6%
Long-run g; for Year 6 and all following years.
20%
6%
Year
0
1
2
3
4
5
6
Dividend
PV of dividends
=
Part 2. Finding the expected dividend yield.
Dividend yield =
/
Dividend yield =
/
Dividend yield =
Part 3. Finding the expected capital gains yield.
Cap. Gain yield=
Expected return
–
Dividend yield
Cap. Gain yield=
–
Cap. Gain yield=
Dividend yield =
/
Dividend yield =
/
Dividend yield =
Cap. Gain yield=
Expected return
–
Dividend yield
Cap. Gain yield=
–
Cap. Gain yield=
Rework Problem 7-19.
Taussig Technologies Corporation (TTC) has been growing at a rate of 20% per year in
recent years. This same growth rate is expected to last for another 2 years (g
1
= g
2
= 20%).
a.
If D
0
= $1.60, r
s
= 10%, and g
n
= 5%, what is TTC's stock worth today?
What are its expected dividend
yield
and capital gains yield at this time?
D
0
r
s
g
s
g
L
= D
3
=
Terminal value
= P
2
=
= r
s
–
g
L
=
P
0
Recall that the expected dividend yield is equal to the next expected annual dividend divided by the price at the
beginning of the period.
D
1
P
0
Alternatively, we can recognize that the capital gains yield measures capital appreciation,
hence solve for the price in
one year, then divide the change in price from today to one year from now by the current price.
To find the price one
year from now, we will have to find the present values of the terminal value and second year dividend to time period
one.
P
1
P
2
D
2
(1 + r
s
)
P
1
P
1
(P
1
–
P
0
)
P
0
b.
Now assume that TTC's period of supernormal growth is to last for 5 years rather than 2 years.
How would
this affect its price, dividend yield, and capital gains yield?
D
0
r
s
g
S
g
L
= D
6
Horizon value
= P
5
=
=
P
0
= r
s
–
g
L
D
1
P
0
c.
What will TTC's dividend yield and capital gains yield be once its period of supernormal growth ends?
(Hint:
These values will be the same regardless of whether you examine the case of 2 or 5 years of supernormal growth,
and the calculations are very easy.)
We used the 5-year supernormal growth scenario for this calculation, but ultimately it does not matter which example
you use, as they both yield the same result.
D
n+1
P
n
Upon reflection, we see that these calculations were unnecessary because the constant growth assumption holds that the
long-term growth rate is the dividend growth rate and the capital gains yield, hence we could have simply subtracted the
long-run growth rate from the required return to find the dividend yield.
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