Question

Computech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it does not pay dividends. However, investors expect Computech to begin paying dividends, beginning with a dividend of $0.50 coming 3 years from today. The dividend should grow rapidly - at a rate of 38% per year - during Years 4 and 5; but after Year 5, growth should be a constant 8% per year.

If the required return on Computech is 13%, what is the value of the stock today? Round your answer to the nearest cent. Do not round your intermediate calculations.

Answer 1

Dividend in year 3(D3) = $0.50

Growth rate of dividend in year 4 & 5(g) = 38%

Growth rate therafter(g1) = 8% per year forever

Required rate of return(ke) = 13%

Calculating the stock price 2-years from today:-

P2 = $0.44+ $0.54 + $0.66 + $14.25

P2 = $15.90

Now, Calculating the Price of stock today:-

P0 = P2/(1+ke)^2

P0 = $15.90/(1+0.13)^2

= $12.45

So, the Value of Stock today is $12.45