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 19% per year - during Years 4 and 5; but after Year 5, growth should be a constant 8% 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.

Open spreadsheet

If the required return on Computech is 15%, what is the value of the stock today? Round your answer to the nearest cent. Do not round your intermediate calculations.

$___________

Answer 1

Price of STock = PV of CFs from it.

Div calculation:

Year	Cash Flow	Formula	Calculation
1	$          -	Given	Given
2	$          -	Given	Given
3	$      1.50	Given	Given
4	$      1.79	D3(1+g)	1.50*1.19
5	$      2.12	D4(1+g)	1.79*1.19
6	$      2.29	2.12*1.08	2.12*1.08

Price after 5 Years = D6 / [ Ke - g ]

= $ 2.29 / [ 15% - 8% ]

= $ 2.29 / 7%

= $ 32.77

P5 - Price after 5 Years

D6 - Div after 6 Years

Ke - Required Ret

g - Growth Rate

Price Today:

Year	Cash Flow	PVF @15%	PV of CFs
1	$          -	0.8696	$          -
2	$          -	0.7561	$          -
3	$      1.50	0.6575	$      0.99
4	$      1.79	0.5718	$      1.02
5	$      2.12	0.4972	$      1.06
5	$   32.77	0.4972	$   16.29
Price Today			$   19.36

Price of stock Today is $ 19.36

Present Value Factor:
PVF(r%, n) = 1 / ( 1 + r )^n
r = Int Rate per period
n = No. of periods