Explore BrainMass
Share

Explore BrainMass

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

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    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.

    © BrainMass Inc. brainmass.com October 9, 2019, 3:41 pm ad1c9bdddf
    https://brainmass.com/business/finance/finance-steps-for-ti-ba-ii-plus-for-von-burns-dividend-yield-capital-gain-yield-10332

    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.

    $2.19