A B C D E F G H

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3 Chapter 7. Ch 7-20 Build a Model
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6 Rework Problem 7-19. Taussig Technologies Corporation (TTC) has been growing at a rate of 20% per year in
7 recent years. This same growth rate is expected to last for another 2 years (g1 = g2 = 20%).
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9 a. If D0 = $1.60, rs = 10%, and gn = 6%, what is TTC's stock worth today? What are its expected dividend yield
10 and capital gains yield at this time?
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12 1. Find the price today.
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14 D0 $1.60
15 rs 10.0%
16 gs 20% Short-run g; for Years 1-2 only.
17 gL 6% Long-run g; for Year 3 and all following years.
18 20% 6%
19 Year 0 1 2 3
20 Dividend
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22 PV of dividends
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24 = D3
25 = Terminal value = P2 =
26 = rs – gL
27 = P0
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30 2. Find the expected dividend yield.
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32 Recall that the expected dividend yield is equal to the next expected annual dividend divided by the price at the
33 beginning of the period.
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35 Dividend yield = D1 / P0
36 Dividend yield = /
37 Dividend yield =
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40 3. Find the expected capital gains yield.
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43 The capital gains yield can be calculated by simply subtracting the dividend yield from the total expected return.
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45 Cap. Gain yield= Expected return – Dividend yield
46 Cap. Gain yield= –
47 Cap. Gain yield=
 A B C D E F G H
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50 Alternatively, we can recognize that the capital gains yield measures capital appreciation, hence solve for the price in
51 one year, then divide the change in price from today to one year from now by the current price. To find the price one
52 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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54 P2 + D2
P1 =
55 (1 + rs)
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57 +
P1 =
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60 P1 =
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62 Cap. Gain yield= (P1 – P0) / P0
63 Cap. Gain yield= /
64 Cap. Gain yield=
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67 b. Now assume that TTC's period of supernormal growth is to last for 5 years rather than 2 years. How would
68 this affect its price, dividend yield, and capital gains yield?
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70 1. Find the price today.
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72 D0 $1.64
73 rs 8.0%
74 gS 6.5% Short-run g; for Years 1-5 only.
75 gL 3.0% Long-run g; for Year 6 and all following years.
76 7% 3%
77 Year 0 1 2 3 4 5 6
78 Dividend
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80 PV of dividends
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87 Horizon value = P5 = =
88 = P0
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91 Part 2. Finding the expected dividend yield.
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93 Dividend yield = D1 / P0
94 Dividend yield = /
 A B C D E F G H
95 Dividend yield =
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98 Part 3. Finding the expected capital gains yield.
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100 Cap. Gain yield= Expected return – Dividend yield
101 Cap. Gain yield= –
102 Cap. Gain yield=
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c. What will TTC's dividend yield and capital gains yield be once its period of supernormal growth ends? (Hint:
105 These values will be the same regardless of whether you examine the case of 2 or 5 years of supernormal growth,
and the calculations are very easy.)

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107 We used the 5-year supernormal growth scenario for this calculation, but ultimately it does not matter which example
108 you use, as they both yield the same result.
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110 Dividend yield = Dn+1 / Pn
111 Dividend yield = /
112 Dividend yield =
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114 Cap. Gain yield= Expected return – Dividend yield
115 Cap. Gain yield= –
116 Cap. Gain yield=
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118 Upon reflection, we see that these calculations were unnecessary because the constant growth assumption holds that the
119 long-term growth rate is the dividend growth rate and the capital gains yield, hence we could have simply subtracted the
120 long-run growth rate from the required return to find the dividend yield.
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86 = D6
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88 = rs – gL
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D0 2
gs 20% 0 1 2 3
gl 7% 2 2.4 2.88 3.0816
beta 1.2 2.137133 2.283668
RRF 7.50% 46.10424
MRP 4% 50.52504 58.1434

rs 12.30%