2/1/2012 Chapter 5. Student Ch 5-20 Build a Model 71 Rework Problem 5-19, Conroy Consulting Corporation (CCC) has been growing at a rate of 30% per year slin recent years. This same growth rate is expected to last for another 2 years (g.-g. 20%). a. If Do = $2.50, r,-12%, and g.-7%, what is CCC's stock worth today? What are its expected dividend II yield and capital gains yield at this time? 131. Find the price today. $2.50 12.0% 30% 30% 7% Do 9e.1 912 9L Short-run g: for Year 1 only Short-run g: for Year 2 only Long-run g: for Year 3 and all following years 7% 30% Year Dividend 4 PV of dividends Horizon value P2 322. Find the expected dividend yield. Ch 5-20 Build a Model Solution Font Alignment 128 4 Recall that the expected dividend yield is equal to the next expected annual dividend divided by the price at the beginning of the period Dividend yield Di 8 Dividend yield o Dividend yield- 42 3. Find the expected capital gains yield. 4S The capital gains yield can be calculated by simply subtracting the dividend yield from the total expected return. 16 47 Cap. Gain yieldExpected returnDividend yield 48 Cap. Gain yield 49 Cap. Gain yield- 1 Altenatively, we can recognize that the capital gains yield measures capital appreciation, hence solve for the 2 in one year, then divide the change in price from today to one year from now by the current price. To find the price 3 one year from now, we will have to find the present values of the terminal value and second year dividend to time 4 period one D2 58 Po (P -Po) | Cap. Gain yield Cap. Gain yield- 66 Cap. Gain yield Ch 5-20 Build a Model Solution chonse Paste lignment Number 128 b. Now assume that cCc's period of nonconstant growth is to last for 5 years rather than 2 years. 0 would this affect its price, dividend yield, and capital gains yield? How 2 1. Find the price today. Do $2.50 12.0% 30% 7% 76 9s Short-run g. for Years 1-5 only Long-run g; tor Year 6 and all foilowing years 30% Year 0 Dividend 2 PV of dividends 83 Horizon value Ps 90 93 Part 2. Finding the expected dividend yield. Di Po 95 Dividend yield 06 Dividend yield 97 Dividend yield- 00 Part 3, Finding the expected capital gains vield Ch 5-20 Build a Model Solution Select destination and press ENTER or choose Paste Clipboard Font Alignment 128 100 Part 3. Finding the expected capital gains yield. 01 02 Cap. Gain yield- Expected returnDividend yield 03 Cap. Gain yield- 104 Cap. Gain yield- c. What will CCc's dividend yield and capital gains yield be once its period of nonconstant growth ends? (Hint: These values will be the same regardless ot whether you examine the case of 2 or 5 years 7 of nonconstant growth, and the calculations are very easy.) 08 oo We used the 5-year nonconstant growth scenario for this calculation, but ultimately it does not matter which example 110 you use, as they both yield the same result 112 Dividend yield 13 Dividend yielda 14 Dividend yield- Dn 1 Dividend yield 116 Cap. Gain yieldExpected return 17 Cap. Gain yield- 18 Cap. Gain yield- 120 Upon reflection, we see that these calculations were unnecessary because the constant growth assumption holds 121 that the long-term growth rate is the dividend growth rate and the capital gains yield, hence we could have simply 22 subtracted the long-run growth rate from the required return to find the dividend yield