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 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).

d. If your calculated intrinsic value differed substantially from the current market price, and if your views are consistent with those of most investors (the marginal investor), what would happen in the marketplace? What would happen if your views were not consistent with those of the marginal investor and you turned out to be correct?