Snyder Computer Chips Inc. is experiencing a period of rapid growth. Earnings and dividends are expected to grow at a rate of 15% during the next two years, at 13% in the third year, and at a constant rate of 6% thereafter. Snyder's last dividend was $1.15, and the required rate of return on the stock is 12%. a. Calculate the value of the stock today. b. Calculate P1 and P2. c. Calculate the dividend yield and the expected capital gains yield for year 1.

Answer

Consider the following calculation

Explanation

D1 = 1.15 * (1+0.15) = 1.3225

D2 = 1.3225 * (1+0.15) = 1.52

D3 = 1.52 * (1+0.13) = 1.719

D4 = 1.719 * (1+0.06) = 1.82

According to dividend discount model,

P0 = D1 / (R-G)

D1 - Dividend at t = 1

R - Required rate

G - Growth rate

P3 = D4 / (R-g) = 1.821 / (0.12-0.06) = 30.36

Find P0 by discounting the future dividends and P3

P0 = 1.3225 / (1+0.12) + 1.52 / (1+0.12) ^2 + 1.718 / (1+0.12) ^3 + 30.36 / (1+0.12) ^3 = $25.23

Current value of stock = $25.23

b. P1 = 1.52 / (1+0.12) ^1 + 1.718 / (1+0.12) ^2 + 30.36 / (1+0.12) ^2 = $26.93

P2 = 1.718 / (1+0.12) ^1 + 30.36 / (1+0.12) ^1 = $28.64

c. Dividend yield = Dividend/Price

For year 1, Dividend yield = 1.3225/25.23 = 0.0524 = 5.24%

Capital gains yield = (P1-P0) / P0 = (26.93-25.23) / 25.23 = 0.0674 = 6.74%