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 46% per year - during Years 4 and 5; but after Year 5, growth should be a constant 6% per year. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below.

If the required return on Computech is 17%, what is the value of the stock today? Round your answer to the nearest cent. Do not round your intermediate calculations.

Answer 1

	A	.	.	B		A*B
Year	Cash Flow			PVF@17%		PV of the cash flows
3	1.5000		Dividend	0.624371	=1/(1.17)^3	0.937
4	2.1900	=1.5*146%	Dividend	0.533650	=1/(1.17)^4	1.169
5	3.1974	=2.19*146%	Dividend	0.456111	=1/(1.17)^5	1.458
5	30.8113	=(3.1974*106%)/(17%-6%)	Terminal price	0.456111	=1/(1.17)^5	14.053
						17.62

Hence Value of Stock Today= $17.62

Value of Stock Today = Present value of Diviends + PV of the  terminal value

Terminal Value at the end of 5th year = [(Dividend at 5 th yaer*(1+g)] / [ required return-g]

here g = Termina growth = 6%

required return = 17%