NONCONSTANT GROWTH STOCK VALUATION 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, then decline to gn 6%.

a. If D0 $1 60 and rs 10%, what is TTC’s stock worth today? What are its expected dividend and capital gains yields at this time, that is, during Year 1?

b. Now assume that TTC’s period of supernormal growth is to last for 5 years rather than 2 years. How would this affect the price, dividend yield, and capital gains yield?

Answer in words only.

c. What will TTC’s dividend and capital gains yields 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; the calculations are very easy.)

d. Explain why investors are interested in the changing relationship between dividend and capital gains yields over time.

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