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 $1.00 coming 3 years from today. The dividend should grow rapidly-at a rate of 34% per year-during Years 4 and 5; but after Year 5, growth should be a constant 9% per year. If the required return on Computech is 15%, what is the value of the stock today? Round your answer to the nearest cent. Do not round your intermediate calculations.

Carnes Cosmetics Co.'s stock price is $79.38, and it recently paid a $3.00 dividend. This dividend is expected to grow by 22% for the next 3 years, then grow forever at a constant rate, g; and rs = 16%. At what constant rate is the stock expected to grow after Year 3? Round your answer to two decimal places. Do not round your intermediate calculations.

Answer 1

Price of stock = PV of Cash Inflows from it.

COmputation of Div:

P5 = D6 / (Ke -g )

= 1.9620 / ( 15% - 9%)

= 1.9620 / 6%

= $ 32.70

P0:

Part B:

Let X be the price after 3 years

Dividend

P0:

Thus 79.38 = 9.96 + 0.6407X

0.6407X = 79.38 - 9.96

= 69.42

X = 69.42 / 0.6407

= 108.35

P3 = D3(1+g) / ( 0.16 - g)

108.35 = 5.4475 (1+g) / ( 0.16 - g)

108.35 (0.16 - g) = 5.4475 + 5.4475g

17.34 - 108.35g = 5.4475 + 5.4475g

108.35g + 5.4475g = 17.34 - 5.4475

113.7977g = 11.8925

g = 11.8925 / 113.7977

= 0.1045 i.e 10.45%

Pls commment, if any further assistance is required.