Excel Finance Assignment

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Ch 5-20 Build a Model Solution

2/1/12
Chapter 5. Student Ch 5-20 Build a Model
Rework Problem 5-19. Conroy Consulting Corporation (CCC) has been growing at a rate of 30% per year in recent years. This same growth rate is expected to last for another 2 years (g1 = g2 = 20%).
a. If D0 = $2.50, rs = 12%, and gn = 7%, what is CCC's stock worth today? What are its expected dividend yield and capital gains yield at this time?
1. Find the price today.
D0 $2.50
rs 12.0%
g0,1 30% Short-run g; for Year 1 only.
g1,2 30% Short-run g; for Year 2 only.
gL 7% Long-run g; for Year 3 and all following years.
30% 7%
Year 0 1 2 3
Dividend
PV of dividends
= D2x(1+g) = D3

Kenneth D. Jackson: Discounted two years 		= Horizon value = P2 =
= rs – gL
= P0
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 = D1 / P0
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=
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.
P1 = P2 + D2
(1 + rs)
P1 = +
P1 =
Cap. Gain yield= (P1 – P0) / P0
Cap. Gain yield= /
Cap. Gain yield=
b. Now assume that CCC's period of nonconstant growth is to last for 5 years rather than 2 years. How would this affect its price, dividend yield, and capital gains yield?
1. Find the price today.
D0 $2.50
rs 12.0%
gS 30% Short-run g; for Years 1-5 only.
gL 7% Long-run g; for Year 6 and all following years.
30% 7%
Year 0 1 2 3 4 5 6
Dividend
PV of dividends
= D5x(1+g) = D6

Kenneth D. Jackson: Discounted 5 years 		Horizon value = P5 = =
= P0 = rs – gL
Part 2. Finding the expected dividend yield.
Dividend yield = D1 / P0
Dividend yield = /
Dividend yield =
Part 3. Finding the expected capital gains yield.
Cap. Gain yield= Expected return – Dividend yield
Cap. Gain yield= –
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 of whether you examine the case of 2 or 5 years of nonconstant growth, and the calculations are very easy.)
We used the 5-year nonconstant growth scenario for this calculation, but ultimately it does not matter which example you use, as they both yield the same result.
Dividend yield = Dn+1 / Pn
Dividend yield = /
Dividend yield =
Cap. Gain yield= Expected return – Dividend yield
Cap. Gain yield= –
Cap. Gain yield=
Upon reflection, we see that these calculations were unnecessary because the constant growth assumption holds that the long-term growth rate is the dividend growth rate and the capital gains yield, hence we could have simply subtracted the long-run growth rate from the required return to find the dividend yield.