Question

consider a stock that is not yet paying dividends. You expect the company to begin paying dividends in 6 years. The first dividend (d6) will be $1. For two years after that, dividends will increase by 37% each year. After that dividends will increase at a rate of 2.5 % per year forever. The required return of this stock is 12.5%.

a) What is the value of the stock today (P0)? What is the value of the stock in five years (p5)? What is the value of this stock in 12 years (p12)?

b) What are the dividend yield and capital gains yield this year? What are the dividend yield and capital gains yield 5 years from now? What are the dividend yield and capital gains yield 12 years from now?

Answer 1

a)	YR	0	1	2	3	4	5	6	7	8	9	10	11	12
	Growth %								37.00%	37.00%	2.50%	2.50%	2.50%	2.50%
	Dividends		0	0	0	0	0	1	1.37	1.88	1.92	1.97	2.02	2.07
	Terminal value									19.24
	Total cash flow		0.00	0.00	0.00	0.00	0.00	1.00	1.37	21.12
	PV @ 12.5%		0.00	0.00	0.00	0.00	0.00	0.49	0.60	8.23
	Share price		9.32
	Share price in 5 years
	YR	5	6	7	8	9	10	11	12
	Growth %			37.00%	37.00%	2.50%	2.50%	2.50%	2.50%
	Dividends		1	1.37	1.88	1.92	1.97	2.02	2.07
	Terminal value				19.24
	Total cash flow		1.00	1.37	21.12
	PV @ 12.5%		0.89	1.08	14.83
	Share price		16.80
	Share price in 12 years
	Dividend in 12th year	2.07
	Growth	2.50%
	Return	12.50%
	Share price	21.24
b)	Year	0	1	5	12
	Dividend		0	0	2.07
	Share price	9.32	10.49	16.80	21.24
	Dividend yield	0	0.00%	0.00%	9.76%
	Capital gain yield		12.50%	12.50%	7.10%