AI Tech Corporation (AIT) is relatively young firm. Although profitable recently, the firm has not paid any dividends in the past years and is not expected to do so in the coming year due to high capital reinvestments. However, the firm is expected to initiate its first dividend payment of $0.25 per share at t=2, in anticipation of higher and more stable operating cash flows. As illustrated in the figure below, AIT's EPS and DPS are expected to grow at 16% p.a. in the next four years. Thereafter, the firm will settle into stable growth and its DPS growth is expected to be constant at 2% p.a. Assume the stock is trading at its intrinsic value and the shareholder's required return (ks) is constant at 8% p.a. Note: E(r)=DY+CG and E(r)= required return (ks) in equilibrium. a) What is AIT's common shares worth today (t=0) ? What are its expected dividend and capital gains yields for Year 1 ( 1st year)? b) Estimate the intrinsic value of share price, Pt, at t=0,1,2,3,4,5, and 6 . c) Calculate the dividend and capital gains yields that shareholders can expect for Year 1, 2,3, 4,5,6, and 7. d) What will AIT's expected dividend and capital gains yields be once its period of high growth ends, i.e., when the firm is in stable growth? e) How would the firm's investors profile (clientele) be affected by the changing relationship between its dividend and capital gains yields over time? Hint: consider the dividend clientele theory. AI Tech Corporation (AIT) is relatively young firm. Although profitable recently, the firm has not paid any dividends in the past years and is not expected to do so in the coming year due to high capital reinvestments. However, the firm is expected to initiate its first dividend payment of $0.25 per share at t=2, in anticipation of higher and more stable operating cash flows. As illustrated in the figure below, AIT's EPS and DPS are expected to grow at 16% p.a. in the next four years. Thereafter, the firm will settle into stable growth and its DPS growth is expected to be constant at 2% p.a. Assume the stock is trading at its intrinsic value and the shareholder's required return (ks) is constant at 8% p.a. Note: E(r)=DY+CG and E(r)= required return (ks) in equilibrium. a) What is AIT's common shares worth today (t=0) ? What are its expected dividend and capital gains yields for Year 1 ( 1st year)? b) Estimate the intrinsic value of share price, Pt, at t=0,1,2,3,4,5, and 6 . c) Calculate the dividend and capital gains yields that shareholders can expect for Year 1, 2,3, 4,5,6, and 7. d) What will AIT's expected dividend and capital gains yields be once its period of high growth ends, i.e., when the firm is in stable growth? e) How would the firm's investors profile (clientele) be affected by the changing relationship between its dividend and capital gains yields over time? Hint: consider the dividend clientele theory
