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 43% 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 18%, what is the value of the stock today? Do not round intermediate calculations. Round your answer to the nearest cent.

A. $______

Answer 1

D3=0.5

D4=(0.5*1.43)=0.715

D5=(0.715*1.43)=1.02245

Value after year 5=(D5*Growth rate)/(Required return-Growth rate)

=(1.02245*1.08)/(0.18-0.08)

=11.04246

Hence current price=Future dividend and value*Present value of discounting factor(rate%,time period)

=0.5/1.18^3+0.715/1.18^4+1.02245/1.18^5+11.04246/1.18^5

=$5.95(Approx)