Finance: Steps for TI BA II Plus for Von Burns dividend yield, capital gain yield

Walk me through the steps to do this on a TI BA II Plus and the rationale.

Von Burns Technologies Ltd. (VBTL) has been growing at a rate of 20% per year in
recent years. This same growth rate is expected to last for another 2 years. (Pr. 10-19)

a. If D0 = $1.60, k = 10%, gn = 6%, what is VBTL stock worth today? What are its
expected dividend yield and capital gains yield at this time?
b. Now assume the VBTL's period of supernormal growth is to last another 5 years rather
than 2 years. How would this affect its price, dividend yield, and capital gains
yield? No calculations necessary to answer this Part b.
c. What will be VBTL's dividend yield and capital gains yield once its period of
supernormal growth ends? (HINT: these values will be the same regardless of
whether you examine the of 2 years or 5 years of supernormal growth; the calculations
are quite easy.)
d. Of what interest to investors is the changing relationship between dividend yield
and capital gains yield over time.

SHOW ALL WORK.

Solution Preview

a. If D0 = $1.60, k = 10%, gn = 6%, what is VBTL stock worth today? What are its expected dividend yield and capital gains yield at this time?

This should be calculated by two steps:
1. The value of two years supernormal growth
D1=D0*(1+Gs)= 1.6*(1+0.20)=1.92
D2=D1*(1+Gs)= 1.92*(1+0.20)=2.304

Then calculate the present value of them on a TI BA II Plus:
N=1, I/Y=10, PMT=0, FV=1.92 -- CPT -> PV= -1.745 = PV(D1)
N=2, I/Y=10, PMT=0, FV=2.304 -- CPT -> PV= -1.904 = PV(D2)

2. The value of normal growth period
Since year 3, the dividend will be
D3=D2*(1+gn)= 2.304*(1+0.06)=2.442

Then we use the function:
P2 = D3/(k-gn)= 2.442/(0.10-0.06)=61.05
Which is the end-of-second year value?
Again, calculate ...

Solution Summary

The solution carefully works through the problems including the financial calculator steps and narrative for easier understanding of the problems.

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