Build A Model Solution Chapter 10

Ch 10 22 Build A Model Solution

Build a comprehensive financial model for Taussig Technologies Corporation (TTC), focusing on its valuation based on growth projections, dividend payments, and stock price calculations. The task involves analyzing two scenarios: one with a short-term growth period of 2 years and another extending the supernormal growth phase to 5 years. The model should include calculations of current stock value, expected dividend yield, capital gains yield, and the impact of altering growth assumptions on these metrics. Additionally, interpret the long-term implications of supernormal growth assumptions on dividend yield and capital gains yield, emphasizing the importance of the dividend discount model (DDM) and its assumptions in stock valuation.

Paper For Above instruction

Taussig Technologies Corporation (TTC) exemplifies a company experiencing rapid growth, necessitating a nuanced valuation approach that considers both short-term extraordinary growth and long-term steady-state growth. The primary method utilized for such valuation is the Dividend Discount Model (DDM), which assesses the present value of expected future dividends, conditioned on growth rates and required returns. This paper develops a detailed financial model to evaluate TTC’s stock price under varying growth scenarios, with firm as well as market implications relevant to investors and financial analysts.

Initially, the valuation under the short-term accelerated growth phase of two years is examined. Given that TTC’s dividend at time zero (D0) is $1.60, and the company’s growth rate over the next two years is projected at 20%, the dividends for the first few years are forecasted as follows: D1 = $1.92 and D2 = approximately $2.304. The model assumes a required rate of return, k, of 10%, which captures investor expectations based on the risk profile of TTC’s cash flows. The long-term growth rate, gL, after two years is projected at 6%, representing the sustainable growth rate for the company once the supernormal growth phase ends.

The valuation process employs the dividend discount approach by calculating the present value of the dividends during the initial supernormal growth period and the terminal value at the end of this phase. The terminal value, P2, is derived from the perpetuity formula, which assumes dividends grow at the long-run rate, gL, beyond year two. Discounting these future cash flows back to the present yields an intrinsic stock price of approximately $54.11 under the 2-year supernormal growth assumption.

Next, the expected dividend yield is computed as the ratio of the next period’s dividend (D1) to the current stock price (P0), resulting in an estimated yield of approximately 3.55%. The capital gains yield, which indicates the expected rate of appreciation of the stock’s price, is calculated as the difference between the expected return (10%) and the dividend yield, leading to a figure of around 6.45%. Alternatively, the capital gains yield can be interpreted directly from the projected increase in stock price over one year, confirming consistency in the valuation assumptions.

The analysis then extends to a scenario where the supernormal growth phase lasts for five years, reflecting a more prolonged period of accelerated growth. Using similar methods, the model calculates a higher stock price, approximately $75.98, due to the increased valuation of future dividends during the extended growth period. Consequently, the dividend yield decreases to about 2.53%, and the capital gains yield increases to about 7.47%, emphasizing how extension of the high-growth period influences these valuation metrics.

Finally, the model addresses what happens once the supernormal growth phase concludes. Under the stable-growth assumption, the dividend yield aligns with the dividend growth rate (6%), and the capital gains yield mirrors the constant growth rate, both aligning with existing financial theory that dividend growth equals the long-term growth rate in perpetuity. The calculations confirm that the long-term dividend yield should be approximately 4%, considering that the dividend at the end of the supernormal period (Dn+1) aligns with the sustainable growth rate, and the stock price reflects these updated expectations.

Overall, this comprehensive financial model highlights the critical importance of growth assumptions in stock valuation. It demonstrates how extending the supernormal growth period increases the present value of the stock, reduces the immediate dividend yield, and increases the capital gains yield. Conversely, when the growth stabilizes, the dividend yield and capital gains rate conform to the theoretical expectations based on the dividend discount model, affirming its robustness in valuation analysis. This work underscores the importance of carefully modeling growth phases and using appropriate discounting to capture the intrinsic value of growth-oriented firms like TTC.

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