Goodwin Technologies, a relatively young comply, has been wildly successful but has yet to pay a dividend. An analyst forecasts that Goodwin is likely to pay its first dividend three years from now. She expects Goodwin to pay a $1.5000 dividend at that time (D3 = i 1.5000) and believes that the dividend will grow by 7.80% for the following two years (D4 and D5). However, after the fifth year, she expects Goodwin's dividend to grow at a constant rate of 3.42% per year. Goodwin's required return is 11.40%. Fill in the following chart to determine Goodwin's horizon value at the horizon date-when constant growth begins-and the current intrinsic value.

Horizon Value

Current Intrinsic Value

To increase the accuracy of your calculations, carry the dividend values to four decimal places.

Horizon value is $22.59  

Intrinsic value is $16.32

Explanation:

D3=1.5000

D4=1.5000*(1+7.8%)

D4=1.6170

D5=1.6170 *(1+7.8%)

D5=1.7431

D6=1.7431 *(1+3.42%)

D6=1.8027

horizon value is the same as the price of the stock(the terminal value) using the dividend in year 6

P=D5*(1+g)/(r-g)

D5=$1.7431

g is the constant growth rate of 3.42%

r is the required rate of return of 11.40%

P=$1.7431*(1+3.42%)/(11.40%-3.42%)

P=$1.8027/0.0798 =$22.59  

Goodwill Technologies share price is $22.59

Current intrinsic value is the dividends payable in relevant years plus the horizon value discount to present value as follows:

Present value of D3                =1.5000/(1+11.40%)^3=$1.0850

present of value of D4            =1.6170 /(1+11.40%)^4=$1.0500

present value of D5                 =1.7431 /(1+11.40%)^5=1.0160

present value of horizon value=$22.59/(1+11.40%)^5=13.1671

Total present values                                                       $16.32                                      

you will have $2593.74 in 10 years if you set aside $1,000 at 10%

you will have $9321.91 in 20 years if you set aside $2000 at 8%

you will have $1469.32 in 5 years if you set aside $1000 at 8%

you will have $1296.87 in 10 years if you set aside $500 at 10%

you will have $239.66 in 15 years if you set aside $100 at 6%

you will have $4660.96 in 20 years if you set aside $1000 at 8%