Reizenstein Technologies (RT) has just developed a solar panel capable of generating 200% more electricity than any

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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 15% 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 5% per year indefinitely. Stockholders require a return of 12% on RT’s stock. The most recent annual dividend (D0), which was paid yesterday, was $1.75 per share.

a. Calculate RT’s expected dividends for t = 1, t = 2, t = 3, t = 4, and t = 5.

b. Calculate the estimated intrinsic value of the stock today, p̂0. Proceed by finding the present value of the dividends expected at t = 1, t = 2, t = 3, t = 4, and t = 5 plus the present value of the stock price that should exist at t = 5, p̂5. The p̂5 stock price can be found by using the constant growth equation. Note that, to find p̂5, you use the dividend expected at t = 6, which is 5% greater than the t = 5 dividend.

c. Calculate the expected dividend yield (D1/p̂0), the capital gains yield expected during the first year, and the expected total return (dividend yield plus capital gains yield) during the first year. (Assume that p̂0 = P0, and recognize that the capital gains yield is equal to the total return minus the dividend yield.) Also calculate these same three yields for t = 5

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Intermediate Financial Management

ISBN: 9781337395083

13th Edition

Authors: Eugene F. Brigham, Phillip R. Daves

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