Problem 7-20 Nonconstant Growth Stock Valuation Rezenstein Technologies (RT) has just developed a solar panel capable of ownerating 200% more electricity than any solar panel currently on the market. As a result, AT expected to experience a 15 annual growth rate for the next 5 years. Wy the end of 5 years, other time will have developed comparable technology, and RT's growth rate will slow to 84 per vear indefinitely, Stockholders require a return of 10 on RT's stock. The most recent annual evidend (oo), which was paid vesterday, was 13.05 per share Calculatu RT's expected dividends for t = 1,1-2, -3, -4, and t - 5. Do not found intermediate calculations, Round your answers to the nearest cent. D: 5 4.20 D=5 4.83 D-5 5.55 De=3 6.38 Ds - 7.34 b. Calculate the estimated Intrinsic value of the stock today, P. Proceed by finding the present value of the dividends expected at 1.-3.1-3, -4, and t - 5 plus the present value of the stock price that should existatt - 5, P.The Pe stock price can be found by using the constant growth equation. Note that to find you use the dividend expected at t = , which is 8% greater than the t-s dividend. Round your answer to the nearest cent. Do not round your intermediate computations 01.01 c. Calculate the expected dividend yield Cow P, the capital gains veld expected during the first year, and the expected total return vidend yield blus capital can Vield) during the first year. Assume that Pe - Pe and recognize that the capital gaini veld is equal to the total return the dividend vind.), Round your answers to two decimal places. Do not round your intermediate computatione Expected dividend vield Capital gains vield Expected total return 15.00 6.17 8.83 Also calculate these same three vields fort - 5 te. ). Round your answers to two decimal places. Do not round your intermediate computations, Expected dividend vield Capital gains veld 6.4 0.00 Expected to retum 15.00 d. If your calculated intrinsic valve differed substantially from the current market price, and your views are consistent with those of most investors (the marinat investor). what would happen in the marketplace? 1. If the price as estimated by the marginal investor differs from the market price, then investors will buy or sell until an equilibrium has been established with the intrinsic value as estimated by the marginal investor equals the actual market price 11. the price as estimated by the marginal investor differs from the market price, then investors will buy or sell until an equilibriuen has been established, with the intrinsic value as estimated by the marginal Investor is more than the actual market price III. If the prices estimated by the marginal investor differs from the market price, then investors will buy or sell und an equlibrium has been established, with the Intrinsic value as estimated by the marginal investor is less than the actual market price IV. If the price us estimated by the marginal Investor differs from the market price. then investors will not buy or sell anything onti a new equitbrum has been establishes 11 What would happen if your views were not consistent with those of the marginal investor and you turned out to be correct? 1. If you think the stock is priced above or below its intrinsic valoe, then you should at least consider buving if the stock is undervalued or selling is overvaloed. If you turn out to be correct, then you will make money, eventually if you hold on to an unpopular position long enough 11. If you think the stock is priced above or below its intrinsic value then you should at least consider selling is the stock is ondervloed or buying the Horvalued. If you turn out to be correct, then you will make money, eventually if you hold on to an unpopular position long enough 111. If you think the stock is priced above or below its intrinsic value then you should at least consider buying it the stock is undervalued or selling it it is overvalued you turn out to be correct, then you will lose money, Eventually if you hold on to an unpopular position long enough IV. If you think the stock is priced above or below its intrinsic value then you should at least considering the stock is undervalued at buying if it is overvalued. If you turn out to be correct, then you will lose money. Eventually if you hold on to our position long enough 1
