I Just have no idea where to start with this problem. Can someone just give me a run down or more?
Assume that it is now January 1, 2015. Wayne-Martin Electric
Inc. (WME) has developed a solar panel capable of generating 200% more electricity than
any other solar panel currently on the market. As a result, WME is expected to experience a
15% annual growth rate for the next 5 years. Other firms will have developed comparable
technology at the end of 5 years, and WMEâs growth rate will slow to 5% per year
indefinitely. Stockholders require a return of 12% on WMEâs stock. The most recent annual
dividend D0 , which was paid yesterday, was $1 75 per share.
a. Calculate WMEâs expected dividends for 2015, 2016, 2017, 2018, and 2019.
b. Calculate the value of the stock today, Proceed by finding the present value of the
dividends expected at the end of 2015, 2016, 2017, 2018, and 2019 plus the present
value of the stock price that should exist at the end of 2019. The year-end 2019 stock
price can be found by using the constant growth equation. Notice that to find
the December 31, 2019, price, you must use the dividend expected in 2020, which is
5% greater than the 2019 dividend.
c. Calculate the expected dividend yield (D1/P0) , capital gains yield, and total return
(dividend yield plus capital gains yield) expected for 2015. (Assume that P0 = P0 and
recognize that the capital gains yield is equal to the total return minus the dividend
yield.) Then calculate these same three yields for 2020.
d. How might an investorâs tax situation affect his or her decision to purchase stocks of
companies in the early stages of their lives, when they are growing rapidly, versus
stocks of older, more mature firms? When does WMEâs stock becomeâmatureâfor
purposes of this question?
e. Suppose your boss tells you she believes that WMEâs annual growth rate will be only
12% during the next 5 years and that the firmâs long-run growth rate will be only 4%.
Without doing any calculations, what general effect would these growth rate changes
have on the price of WMEâs stock?
f. Suppose your boss also tells you that she regards WME as being quite risky and that
she believes the required rate of return should be 14%, not 12%. Without doing any
calculations, determine how the higher required rate of return would affect the price of
the stock, the capital gains yield, and the dividend yield. Again, assume that the longrun growth rate is 4%
I Just have no idea where to start with this problem. Can someone just give me a run down or more?
Assume that it is now January 1, 2015. Wayne-Martin Electric
Inc. (WME) has developed a solar panel capable of generating 200% more electricity than
any other solar panel currently on the market. As a result, WME is expected to experience a
15% annual growth rate for the next 5 years. Other firms will have developed comparable
technology at the end of 5 years, and WMEâs growth rate will slow to 5% per year
indefinitely. Stockholders require a return of 12% on WMEâs stock. The most recent annual
dividend D0 , which was paid yesterday, was $1 75 per share.
a. Calculate WMEâs expected dividends for 2015, 2016, 2017, 2018, and 2019.
b. Calculate the value of the stock today, Proceed by finding the present value of the
dividends expected at the end of 2015, 2016, 2017, 2018, and 2019 plus the present
value of the stock price that should exist at the end of 2019. The year-end 2019 stock
price can be found by using the constant growth equation. Notice that to find
the December 31, 2019, price, you must use the dividend expected in 2020, which is
5% greater than the 2019 dividend.
c. Calculate the expected dividend yield (D1/P0) , capital gains yield, and total return
(dividend yield plus capital gains yield) expected for 2015. (Assume that P0 = P0 and
recognize that the capital gains yield is equal to the total return minus the dividend
yield.) Then calculate these same three yields for 2020.
d. How might an investorâs tax situation affect his or her decision to purchase stocks of
companies in the early stages of their lives, when they are growing rapidly, versus
stocks of older, more mature firms? When does WMEâs stock becomeâmatureâfor
purposes of this question?
e. Suppose your boss tells you she believes that WMEâs annual growth rate will be only
12% during the next 5 years and that the firmâs long-run growth rate will be only 4%.
Without doing any calculations, what general effect would these growth rate changes
have on the price of WMEâs stock?
f. Suppose your boss also tells you that she regards WME as being quite risky and that
she believes the required rate of return should be 14%, not 12%. Without doing any
calculations, determine how the higher required rate of return would affect the price of
the stock, the capital gains yield, and the dividend yield. Again, assume that the longrun growth rate is 4%
