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Reizenstein Technologies (RT) has just developed a solar panel capable of

generating 200% more electricity than any solar panel currently on the market. As a

result, RT is expected to experience a 15% annual growth rate for the next 5 years.

By the end of 5 years, other firms will have developed comparable technology, and

RT s growth rate will slow to 5% per year indefinitely. Stockholders require a return

of 12% on RT s stock. The most recent annual dividend (D0 ), which was paid

yesterday, was $1.75 per share.

a. Calculate RT s expected dividends for t = 1, t = 2, t = 3, t = 4, and t = 5.

b. Calculate the estimated intrinsic value of the stock today, ^P0 . Proceed by finding the

present value of the dividends expected at t = 1, t = 2, t = 3, t = 4, and t = 5 plus the

present value of the stock price that should exist at t = 5, ^P5 . The ^P5 stock price can be found by using the constant growth equation. Note that to find ^P5 you

use the dividend expected at t = 6, which is 5% greater than the t = 5

dividend.

c. Calculate the expected dividend yield (D1 /P0

^ ), the capital gains yield expected during the first year, and the expected total return (dividend yield plus capital

gains yield) during the first year. (Assume that P0^ = P0 , and recognize that the capital gains yield is equal to the total return minus the dividend yield.) Also calculate these same three yields for t = 5 (e.g., D6 /P5^ ).

a. $2.01, $2.31, $2.66, $3.06, $3.52.

b. P^0 = $39.42.

c. D1 /P0 = 5.10%; D6 /P5 = 7.00%.