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 35% per year—during Years 4 and 5; but after Year 5, growth should be a constant 7% per year. If the required return on Computech is 13%, what is the value of the stock today?

Answer 1

	Required rate=	13.00%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	0	0.00%	0		0	1.13	0
2	0	0.00%	0		0	1.2769	0
3	0	0.00%	0.5		0.5	1.442897	0.34653
4	0.5	35.00%	0.675		0.675	1.63047361	0.41399
5	0.675	35.00%	0.91125	16.251	17.16225	1.842435179	9.31498
	Long term growth rate (given)=	7.00%			Value of Stock =	Sum of discounted value =	10.08
Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year
Unless dividend for the year provided
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 5 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor