As companies evolve, certain factors can drive sudden growth. This may lead to a period of nonconstant, or variable, growth. This would cause theGoodwin Technologies, a relatively young company, has been wildly successful but has yet to pay a dividend. An analyst forecasts that Goodwin isAs companies evolve, certain factors can drive sudden growth. This may lead to a period of nonconstant, or variable, growth. This would cause the

expected growth rate to increase or decrease, thereby affecting the valuation model. For companies in such situations, you would refer to the variable,

or nonconstant, growth model for the valuation of the company's stock.

Consider the case of Portman Industries:

Portman Industries just paid a dividend of $$2\mathrm{.}64$ per share. The company expects the coming year to be very profitable, and its dividend is expected

to grow by $16\mathrm{.}00\%$ over the next year. After the next year, though, Portman's dividend is expected to grow at a constant rate of $3\mathrm{.}20\%$ per year.

Assuming that the market is in equilibrium, use the information just given to complete the table.

likely to pay its first dividend three years from now. She expects Goodwin to pay a $$3\mathrm{.}25000$ dividend at that time $($D: $=$$$3\mathrm{.}25000)$ and believes that

the dividend will grow by $16\mathrm{.}90000\%$ for the following two years $($D$4$ and $D_2).$ However, after the fifth year, she expects Goodwin's dividend to grow at

a constant rate of $3\mathrm{.}84000\%$ per year:

Goodwin's required return is $12\mathrm{.}80000\%.$ Fill in the following chart to determine Goodwin's 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.

Current intrinsic value

If investors expect a total return of $13\mathrm{.}80\%,$ what will be Goodwin's expected dividend and capital gains yield in two years$-$that 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 $($DYs$)$

Expected capital gains yield $($CGYs$)$

Goodwin has been very successful, but it hasn't 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 hasn't paid a dividend yet?

No

Yes

expected growth rate to increase or decrease, thereby affecting the valuation model. For companies in such situations, you would refer to the variable,

or nonconstant, growth model for the valuation of the company's stock.

Consider the case of Portman Industries:

Portman Industries just paid a dividend of $$1\mathrm{.}68$ per share. The company expects the coming year to be very profitable, and its dividend is expected

to grow by $20\mathrm{.}00\%$ over the next year. After the next year, though, Portman's dividend is expected to grow at a constant rate of $4\mathrm{.}00\%$ per year.

Assuming that the market is in equilibrium, use the information just given to complete the table.

Term

Value

Dividends one year from now $(D_1)$

Horizon value $($ widehat$(P{)}_1)$

Intrinsic value of Portman's stock

The risk$-$free rate $(\{$:$r_{RF})$ is $5\mathrm{.}00\%,$ the market risk premium $(R_M)$ is $6\mathrm{.}00\%,$ and Portman's beta is $1\mathrm{.}50.$

What is the expected dividend yield for Portman's stock today?

$10\mathrm{.}97\%$

$10\mathrm{.}00\%$

$8\mathrm{.}00\%$

$9\mathrm{.}62\%$