Question

Nonconstant Growth Stock Valuation Reizenstein Technologies (RT) has just developed a solar panel capable of generating 200% more electricity than any solar panel currently on the market. As a result, RT is expected to experience a 14% annual growth rate for the next 5 years. By the end of 5 years, other firms will have developed comparable technology, and RT's growth rate will slow to 8% per year indefinitely. Stockholders require a return of 11% on RT's stock. The most recent annual dividend (Do), which was paid yesterday, was $1.35 per share. a. Calculate RT's expected dividends for t = 1,t = 2, t = 3, t = 4, and t = 5. Do not round intermediate calculations. Round your answers to the nearest cent. D1 - $ Ds $ b. Calculate the estimated intrinsic value of the stock today, Po. Proceed by finding the present value of the dividends expected at t -1, -2,t = 3, t = 4, and t = 5 plus the present value of the stock price that should exist at t -5, Ps. The Ps stock price can be found by using the constant growth equation. Note that to find P's you use the dividend expected att 6, which is 8% greater than the t. 5 dividend. Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

a.Expected Dividend = D0(1+g)^number of years
D1	1.54
D2	1.75
D3	2.00
D4	2.28
D5	2.60
Value of Stock today = 1.54/(1.11)+1.75/(1.11)^2 + 2/(1.11)^3 + 2.28/(1.11)^4 + 2.60/(1.11)^5 + 2.60(1.08)/(1.11)^5(11%-8%)
=$62.86
c.Dividend yield = Expected Dividend/Current Price
=1.54/62.86
2.45%
Capital Gains yield = 11%-2.45%
8.55%
Total return = 11%
Price at the end of 5 years = 55.55
Dividend yield = 5.05%
Capital gains yield = 5.95%
Total Return = 11%