Chapter 9. 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 (g₁ = g₂ = 20%).

a. If current dividend, D₀ = $1.60, R = 10%, and g_n = 6%, what is TTC's stock worth today?

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A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 B C D E F G H I J K Chapter 9. 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 (g1 = g2 = 20%). a. If current dividend, D0 = $1.60, R = 10%, and gn = 6%, what is TTC's stock worth today? 1. Find the price today. D0 $1.60 10.0% 20% 6% R gh g Current dividend Short-run high growth gh; for Years 1-2 only. 20% Year Dividend 0 constant growth g; for Year 3 and all following years. 6% 1 2 3 PV of dividends = D3 = Terminal value = P2 = = rs - gL = P0 See the example 9.5 on page 281 of the text 2. Find the expected dividend yield. D1 Dividend yield = Dividend yield = Dividend yield = / / P0 3. Find the expected capital gains yield. P1 = P1 (P1 - P0) + (1 + R) D2 = Cap. Gain yield= Cap. Gain yield= Cap. Gain yield= Dividend yield = P1 - - P2 Cap. Gain yield= Expected return Cap. Gain yield= Cap. Gain yield= + / / P0 b. Now assume that TTC's period of high growth is to last for 5 years rather than 2 years. affect its price, dividend yield, and capital gains yield? How would this 1. Find the price today. D0 rs gh $1.60 10.0% 20% 6% g Short-run high growth g; for Years 1-5 only. Long-run constant g; for Year 6 and all following years. 20% Year Dividend 0 6% 1 2 3 4 5 6 PV of dividends = D6 Terminal value = P5 = = P0 Part 2. Finding the expected dividend yield. = = rs - gL L 93 94 95 96 97 98 99 100 101 102 103 104 A Dividend yield = Dividend yield = Dividend yield = B D1 C / / D P0 E F G H Part 3. Finding the expected capital gains yield. Cap. Gain yield= Expected return Cap. Gain yield= Cap. Gain yield= - - Dividend yield c. What will TTC's dividend yield and capital gains yield be once its period of high growth ends? (Hint: These 105 values will be the same regardless of whether you examine the case of 2 or 5 years of supernormal growth, and the calculations are very easy.) 106 107 108 109 110 111 112 113 114 115 116 Dividend yield = Dividend yield = Dividend yield = Dn+1 Cap. Gain yield= Expected return Cap. Gain yield= Cap. Gain yield= / / - - Pn Dividend yield I J K L