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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 $1.50 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 8% per year. If the required return on Computech is 14%, what is the value of the stock today? Do not round intermediate calculations. Round your answer to the nearest cent.

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Solutions

Expert Solution

D3 = $1.50

D4 = D3 * (1 + g1) = $1.50 * (1 + 0.35) = $2.025

D5 = D4 * (1 + g1) = $2.025 * (1 + 0.35) = $2.734

D6 = D5 * (1 + gC) = $2.734 * (1 + 0.08) = $2.952

P5 = D6/[r-gC] = $2.952/[0.14-0.08] = $2.952/0.06 = $49.21

P0 = [D3/(1+r)3] + [D4/(1+r)4] + [(D5+P5)/(1+r)5]

= [$1.5/(1+0.08)3] + [$2.025/(1+0.08)4] + [($2.734+$49.21)/(1+0.08)5]

= $1.19 + $1.49 + $35.35

= $38.03

jeff jeffy answered 2 years ago
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