Taussig Technologies Corporation (TTC) has been growing at a rate of 20 percent per year in recent years. This same growth rate is expected to last for another 2 years.
a. If D0 = $1.60, rs = 10%, and gn = 6%, what is TTC's stock worth today? What are its expected dividend yield and capital gains yield at this time?
b. Now assume that TTC'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? Answer in words only.
c. What will be TTC'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 case of 2 or 5 years of supernormal growth; the calculations are very easy.)
d. Of what interest to investors is the changing relationship between dividend yield and capital gains yield over time?