# Question: Swink Electric Inc has just developed a solar panel capable

Swink Electric, Inc., has just developed a solar panel capable of generating 200 percent more electricity than any solar panel currently on the market. As a result, Swink is expected to experience a 15 percent annual growth rate for the next five years. When the five-year period ends, other firms will have developed comparable technology, and Swink’s growth rate will slow to 5 percent per year indefinitely. Stockholders require a return of 12 percent on Swink’s stock.

The firm’s most recent annual dividend (D0), which was paid yesterday, was $1.75 per share.

a. Calculate Swink’s expected dividends for the next five years.

b. Calculate the value of the stock today. Proceed by finding the present value of the dividends expected at the end of the next five years plus the present value of the stock price that should apply at the end of Year 5. You can find the Year 5 stock price by using the constant growth equation (Equation). To find the Year 5 price, use the dividend expected in Year 6, which is 5 percent greater than the Year 5 dividend.

c. Calculate the dividend yield, D1 P0, the expected capital gains yield, and the expected total return (dividend yield plus capital gains yield) for this year. (Assume that P0 = P0, and recognize that the capital gains yield is equal to the total return minus the dividend yield.) Calculate these same three yields for Year 5.

d. Suppose your boss believes that Swink’s annual growth rate will be only 12 percent during the next five years and that the firm’s normal growth rate will be only 4 percent. Without doing any calculations, explain the general effect that these growth-rate changes would have on the price of Swink’s stock

e. Suppose your boss also regards Swink as being quite risky and believes that the required rate of return for this firm should be 14 percent, not 12 percent. Without doing any calculations, explain how the higher required rate of return would affect the price of the stock, its capital gains yield, and its dividend yield.

The firm’s most recent annual dividend (D0), which was paid yesterday, was $1.75 per share.

a. Calculate Swink’s expected dividends for the next five years.

b. Calculate the value of the stock today. Proceed by finding the present value of the dividends expected at the end of the next five years plus the present value of the stock price that should apply at the end of Year 5. You can find the Year 5 stock price by using the constant growth equation (Equation). To find the Year 5 price, use the dividend expected in Year 6, which is 5 percent greater than the Year 5 dividend.

c. Calculate the dividend yield, D1 P0, the expected capital gains yield, and the expected total return (dividend yield plus capital gains yield) for this year. (Assume that P0 = P0, and recognize that the capital gains yield is equal to the total return minus the dividend yield.) Calculate these same three yields for Year 5.

d. Suppose your boss believes that Swink’s annual growth rate will be only 12 percent during the next five years and that the firm’s normal growth rate will be only 4 percent. Without doing any calculations, explain the general effect that these growth-rate changes would have on the price of Swink’s stock

e. Suppose your boss also regards Swink as being quite risky and believes that the required rate of return for this firm should be 14 percent, not 12 percent. Without doing any calculations, explain how the higher required rate of return would affect the price of the stock, its capital gains yield, and its dividend yield.

**View Solution:**## Answer to relevant Questions

Tanner Technologies Corporation (TTC) has been growing at a rate of 20 percent per year in recent years. This same growth rate is expected to last for another two years.a. If D0 = $1.60, rs = 10%, and gnorm = 6%, what is ...Explain why systematic risk is the relevant risk of an investment and why investors should be rewarded only for this type of risk.Terry recently invested equal amounts in five stocks to form an investment portfolio, which has a beta equal to 1.2—that is, βP = 1.2. Terry is considering selling the riskiest stock in the portfolio, which has a beta ...Using the model in File C11, rework Problem 11-27, assuming that a third stock, Stock C, is available for inclusion in the portfolio. Stock C has the following historical returns:Year Stock C’s Return, ¨rC2011 ...Analysts of the ICM Corporation have indicated that the company is expected to grow at a 5 percent rate for as long as it is in business. Currently, ICM’s stock is selling for $70 per share. The most recent dividend paid ...Post your question