Computech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it...

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 $1.75 coming 3 years from today. The dividend should grow rapidly at a rate of 26% per year-during Years 4 and 5; but after Year 5, growth should be a constant 4% per year. If the required return on Computech is 16%, what is the value of the stock today? Round your answer to the nearest cent. Do not round your intermediate calculations. $

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Expert Solution

Dividend in Year 3 = $1.75

Stock Price at the end of Year 2 = 1.75/(1.16)² + 1.75(1.26)/(1.16)³ + 1.75(1.26)²/(1.16)⁴ + 1.75(1.26)²(1.04)/(0.16 - 0.04)(1.16)⁴

Stock Price at the end of Year 2 = 1.30 + 1.41 + 1.53 + 13.30

Stock Price at the end of Year 2 = $17.54

Stock Price today = 17.54/(1.16)²

Stock Price today = $13.04

jeff jeffy answered 1 year ago

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