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 $1.50 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.

$  

Answer 1

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