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 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 14%, what is the value of the stock today? Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

D3=1.5

D4=(1.5*1.43)=2.145

D5=(2.145*1.43)=3.06735

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

=(3.06735*1.08)/(0.14-0.08)

=55.2123

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

=1.5/1.14^3+2.145/1.14^4+3.06735/1.14^5+55.2123/1.14^5

=$32.55(Approx)