The head of the accounting department at a major software manufacturer has asked you to put together a pro forma statement of the company's value under several possible growth scenarios and the assumption that the company’s many divisions will remain a single entity forever. The manager is concerned that, despite the fact that the firm’s competitors are comparatively small, collectively their annual revenue growth has exceeded 50 percent over each of the last five years. She has requested that the value projections be based on the firm’s current profits of $5.1 billion (which have yet to be paid out to stockholders) and the average interest rate over the past 20 years (6 percent) in each of the following profit growth scenarios: a. Profits grow at an annual rate of 8 percent. (This one is tricky.) (Click to select) This growth rate is not possible The firm's value is infinite The firm's value is zero The firm will have to shut down at this growth rate Instructions: Round your responses to 2 decimal places. b. Profits grow at an annual rate of 3 percent. $____ billion c. Profits grow at an annual rate of 0 percent. $____ billion d. Profits decline at an annual rate of 4 percent. $____ billion
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Goodwin Technologies, a relatively young company, 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 $1.75000 dividend at that time (D₃ = $1.75000) and believes that the dividend will grow by 9.10000% 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 3.48000% per year. Goodwin’s required return is 11.60000%. Fill in the following chart to determine Goodwin’s horizon value at the horizon date (when constant growth begins) and the current intrinsic value. To increase the accuracy of your calculations, do not round your intermediate calculations, but round all final answers to two decimal places. Term Value Horizon value Current intrinsic value Assuming that the markets are in equilibrium, Goodwin’s current expected dividend yield is , and Goodwin’s capital gains yield is . Goodwin has been very successful, but it hasn’t paid a dividend yet. It circulates a report to its key investors containing the following statement: Goodwin’s investment opportunities are poor. Is this statement a possible explanation for why the firm hasn’t paid a dividend yet? Yes No
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