Chapter 7.
Ch 720 Build a Model
1.
Find the price today.
$1.60
10.0%
20%
Shortrun g; for Years 12 only.
6%
Longrun g; for Year 3 and all following years.
20%
6%
Year
0
1
2
3
Dividend
PV of dividends
2.
Find the expected dividend yield.
Dividend yield =
/
Dividend yield =
/
Dividend yield =
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=
–
Cap. Gain yield=
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 (g
1
= g
2
= 20%).
a.
If D
0
= $1.60, r
s
= 10%, and g
n
= 6%, what is TTC's stock worth today?
What are its expected dividend
yield
and capital gains yield at this time?
D
0
r
s
g
s
g
L
= D
3
=
Terminal value
= P
2
=
= r
s
–
g
L
=
P
0
Recall that the expected dividend yield is equal to the next expected annual dividend divided by the price at the
beginning of the period.
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 Spring '11
 Johnson
 Harshad number, Dividend yield, Prime number, Gain yield=

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