Question

Problem 2: swink Electric, Inc., has just developed a solar panel capable of generating 1200 percent more electricity than any solar panel currently on the market. As a result, Swink is expected to experience a 15 percent annual growth rate for the next five years. When the five-year period ends, other firms will have developed comparable technology, and Swink's growth rate will slow to 5 percent per year indefinitely. Stockholders require a return of 12 percent on Swink's stock. The firm's most recent annual dividend (DO), which was paid yesterday, was $1.75 per share. 2.a. (8 points) Calculate Swink's expected dividends for the next five years and present values of these dividends. INPUT DATA: Supernormal growth Normal growth rate Req. rate of return Last dividend (D) Supernormal period years

Answer 1

To calculate the expected value of the dividend is we use Future value formula and to calculate discount value we use present value of the expected dividend.

current dividend = $1.75

Growth rate for first 5 year is 15% and then 5% forever

Required rate of return is 12%

(A) Expected Dividend = D₀((1+r)ⁿ-1)/r

= 1.75((1.15)⁵-1))/0.15 = $15.75

It means to get $15.75 after five we have to invest $1.75 every year for five year.

(B) Present Value = here we use growing annuity.

D₀/(r-g)*(1-((1+g)/(1+r))ⁿ

Where r = Required rate

g = Growth rate

  n = no. of year

= 1.75/(.12-.15)*(1-((1.15)/(1.12))⁵

= $13.69

So the present value is $13.69 if $1.75 will growth @ 15% for 5 year.

Note: we can do this problems into excel also by using formula PV and FV.