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9. Stocks that don't pay dividends yet Goodwin Technologies, a relatively young company, has been wildly successful but has yet to pay a dividend. An

9. Stocks that don't pay dividends yet

Goodwin Technologies, a relatively young company, has been wildly successful but has yet to pay a dividend. An analyst forecasts that Goodwin is likely to pay its first dividend three years from now. She expects Goodwin to pay a $2.00000 dividend at that time (D = $2.00000) and believes that the dividend will grow by 10.40000% for the following two years (D and D). However, after the fifth year, she expects Goodwins dividend to grow at a constant rate of 3.54000% per year.

Goodwins required return is 11.80000%. Fill in the following chart to determine Goodwins horizon value at the horizon date (when constant growth begins) and the current intrinsic value. To increase the accuracy of your calculations, do not round your intermediate calculations, but round all final answers to two decimal places.

Term

Value

Horizon value
Current intrinsic value

Horizon value: Choose one ($30.56, $21.39, $25.98, $36.67)

Current intrinsic value: ($20.31, $9.24, $22.35, $2174)

If investors expect a total return of 12.80%, what will be Goodwins expected dividend and capital gains yield in two yearsthat is, the year before the firm begins paying dividends? Again, remember to carry out the dividend values to four decimal places. (Hint: You are at year 2, and the first dividend is expected to be paid at the end of the year. Find DY and CGY.)

Expected dividend yield (DY)
Expected capital gains yield (CGY)

Expected dividend yield (DY): (9.20%, 10.16%, 7.98%, 8.26%)

Expected capital gains yield (CGY): (4.54%, 4.01%, 11.72%, 2.85%)

Goodwin has been very successful, but it hasnt paid a dividend yet. It circulates a report to its key investors containing the following statement:

Goodwin has a large selection of profitable investment opportunities.

Is this statement a possible explanation for why the firm hasnt paid a dividend yet?

Yes

No

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