EFM-09problem

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09problem 3/22/2010 7:09 12/14/2005 Chapter 9. Solution for End-of-Chapter Comprehensive/Spreadsheet problem Problem 9-25 Taussig Technologies Corporation (TTC) has been growing at a rate of 20% per year in recent years. This and capital gains yields at this time, that is, during Year 1? 1. Find the price today. \$1.60 10.0% 20% Short-run g; for Years 1-2 only. 6% Long-run g; for Year 3 and all following years. 20% 6% Year 0 1 2 3 Dividend \$1.60 1.92 2.3 2.44 PV of dividends \$1.7455 1.9041 2.4422 \$50.4595 61.0560 4.0% \$54.1091 2. Find the expected dividend yield. 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 = / Dividend yield = \$1.920 / \$54.109 Dividend yield = 3.55% 3. Find the expected capital gains yield. The capital gains yield can be calculated by simply subtracting the dividend yield from the total expected return. Cap. Gain yield= Expected return Dividend yield Cap. Gain yield= 10.0% 3.55% Cap. Gain yield= 6.45% Alternatively, we can recognize that the capital gains yield measures capital appreciation, hence solve for the price in one year, then divide the change in price from today to one year from now by the current price. To find the price one year from now, we will have to find the present values of the terminal value and second year dividend to time period one.

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