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 $0.75 coming 3 years from today. The dividend should grow rapidly-at a rate of 34% per year-during Years 4 and 5; but after Year 5, growth should be a constant 6% per year. If the required return on Computech is 15%, what is the value of the stock today? Do not round intermediate calculations. Round your answer to the nearest cent.

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Answer 1

Stock Price :
PV of cash flows from it.

P = D1 / [ Ke - g ]
D1 - Div after 1 Year
P0 - Price Today
Ke - Required Ret
g - Growth rate

Particulars	Year	Value
Starting Dividend	3	$       0.75

Year	Growth Rate
4	34.00%
5	34.00%
6	6.00%

Year	Cash Flow / Div	Formula	Calculation
3	$                      0.75	Given	Given
4	$                      1.01	D1 ( 1 + g)	0.75 * ( 1 + 0.34 )
5	$                      1.35	D2 ( 1 + g)	1.01 * ( 1 + 0.34 )
6	$                      1.43	D3 ( 1 + g)	1.35 * ( 1 + 0.06 )

Particulars	Amount
nth Period	6
D6	$   1.4300
Growth rate	6.00%
Ke	15.00%

nth Period - From which period Stable Growth is there.

Price of Stock is nothing but PV of CFs from it.
P5 = D6 / [ Ke - g ]
= $ 1.43 / [ 15 % - 6 % ]
= $ 1.43 / [ 9 % ]
= $ 15.89

Value of the stock :

Year	Particulars	Cash Flow	PVF @15 %	Disc CF
1	D1	$                            -	0.8696	$                   -
2	D2	$                            -	0.7561	$                   -
3	D3	$                       0.75	0.6575	$              0.49
4	D4	$                       1.01	0.5718	$              0.57
5	D5	$                       1.35	0.4972	$              0.67
5	P5	$                     15.89	0.4972	$              7.90
		Price of the stock		$              9.64

please comment if any further assistance is required.