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NONCONSTANT GROWTH Computech Corporation is expanding rapidly and currently needs to retain all of its earnings;...

NONCONSTANT GROWTH 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?

Solutions

Expert Solution

D3=0.5

D4=(0.5*1.35)=0.675

D5=(0.675*1.35)=0.91125

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

=(0.91125*1.07)/(0.13-0.07)

=16.250625

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

=0.5/1.13^3+0.675/1.13^4+0.91125/1.13^5+16.250625/1.13^5

=$10.08(Approx)

jeff jeffy answered 2 years ago
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