Finance-Taussig Technologies Corporation (TTC)

| January 30, 2017

Question
Chapter 9. Stock Valuation
Taussig Technologies Corporation (TTC) has been growing at a rate of 20% per year in recent years. This same growth rate is expected to last for another 2 years (g1 = g2 = 20%).
a. If current dividend, D0 = $1.60, R = 10%, and gn = 6%, what is TTC’s stock worth today?
1. Find the price today.
D0 $1.60 Current dividend
R 10.0%
gh 20% Short-run high growth gh; for Years 1-2 only.
g 6% constant growth g; for Year 3 and all following years.
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20%
6%
Year 0 1 2 3
Dividend
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PV of dividends
= D3
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= Terminal value = P2 =
= rs – gL
= P0
See the example 9.5 on page 281 of the text
2. Find the expected dividend yield.
Dividend yield = D1 / P0
Dividend yield = /
Dividend yield =
3. Find the expected capital gains yield.
Cap. Gain yield= Expected return – Dividend yield
Cap. Gain yield= –
Cap. Gain yield=
P1 = P2 + D2
(1 + R)
P1 = +
P1 =
Cap. Gain yield= (P1– P0) / P0
Cap. Gain yield= /
Cap. Gain yield=
b. Now assume that TTC’s period of high growth is to last for 5 years rather than 2 years. How would this affect its price, dividend yield, and capital gains yield?
1. Find the price today.
D0 $1.60
rs 10.0%
gh 20% Short-run high growth g; for Years 1-5 only.
g 6% Long-run constant g; for Year 6 and all following years.
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20%
6%
Year 0 1 2 3 4 5 6
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Dividend
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PV of dividends
= D6
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Terminal value = P5 = .gif”>
=
= P0 = rs – gL
Part 2. Finding the expected dividend yield.
Dividend yield = D1 / P0
Dividend yield = /
Dividend yield =
Part 3. Finding the expected capital gains yield.
Cap. Gain yield= Expected return – Dividend yield
Cap. Gain yield= –
Cap. Gain yield=
c. What will TTC’s dividend yield and capital gains yield be once its period of high growth ends? (Hint: These values will be the same regardless of whether you examine the case of 2 or 5 years of supernormal growth, and the calculations are very easy.)
Dividend yield = Dn+1 / Pn
Dividend yield = /
Dividend yield =
Cap. Gain yield= Expected return – Dividend yield
Cap. Gain yield= –
Cap. Gain yield=

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