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 $1.5000 dividend at that time (D3D3 = $1.5000) and believes that the dividend will grow by 7.80% for the following two years (D4D4 and D5D5). However, after the fifth year, she expects Goodwins dividend to grow at a constant rate of 3.42% per year.

Goodwins required return is 11.40%. Fill in the following chart to determine Goodwins horizon value at the horizon datewhen constant growth beginsand the current intrinsic value. To increase the accuracy of your calculations, carry the dividend values to four decimal places.

Term	Value
Horizon value
Current Intrinsic value

If investors expect a total return of 12.40%, 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 DY3DY3 and CGY3CGY3.)

Expected dividend yield (DY3DY3)
Expected capital gains yield (CGY3CGY3)

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

Goodwins investment opportunities are poor.

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

Yes

No