Question

1)...Taussig Technologies Corporation (TTC) has been growing at a rate of 12% per year in recent years. This same growth rate is expected to last for another 2 years, then decline to g_n = 6%.

a).If D₀ = $1.50 and r_s = 10.00%, what is TTC's stock worth today? Round your answer to the nearest cent. Do not round your intermediate calculations.
b). What is its expected dividend yield at this time, that is, during Year 1? Round your answer to two decimal places. Do not round your intermediate calculations.
c). What is its capital gains yields at this time, that is, during Year 1? Round your answer to two decimal places. Do not round your intermediate calculations.

2). A stock is expected to pay a dividend of $2.00 at the end of the year (i.e., D₁ = $2.00), and it should continue to grow at a constant rate of 6% a year. If its required return is 14%, what is the stock's expected price 3 years from today? Round your answer to two decimal places. Do not round your intermediate calculations.

Answer 1

1.a)Value of stock is equal to the present value of future dividends

= 1.50(1.12)/(1.10) + 1.50(1.12)²/(1.10)²+ 1.50(1.12)² (1.06)/(10%-6%)(1.10)²

= $44.29

b)Dividend Yield = Expected Dividend/Current Price

= 1.50(1.12)/44.29

= 3.79%

c)Price of Stock At the end of year 1 = 1.50(1.12)²/(1.12) + 1.50(1.12)² (1.06)/(10%-6%)(1.10)

= $47.04

Capital Gains yield = (47.04-44.29)/44.29

= 6.21%

2)Stock Price 3 years from today is equal to the value of all future dividends

= 2(1.06)³/(14%-6%)

= $29.78