Question

Goodwin Technologies, a relatively young company, has been wildly successful but has yet to pay a dividend. An analyst forecasts that Goodwin is likely to pay its first dividend three years from now. She expects Goodwin to pay a $4.7500 dividend at that time (D3D3 = $4.7500) and believes that the dividend will grow by 24.70% for the following two years (D4D4 and D5D5). However, after the fifth year, she expects Goodwin’s dividend to grow at a constant rate of 4.20% per year.

Goodwin’s required return is 14.00%. 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, carry the dividend values to four decimal places.

Term	Value
Horizon value
Current Intrinsic value

Assuming that the markets are in equilibrium, Goodwin’s current expected dividend yield is ____ , and Goodwin’s capital gains yield is ____ .

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’s investment opportunities are poor.

Is this statement a possible explanation for why the firm hasn’t paid a dividend yet?

Yes

No

Answer 1