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Computech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it...

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 32% 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 14%, what is the value of the stock today? Do not round intermediate calculations. Round your answer to the nearest cent. $

Solutions

Expert Solution

D3=0.75

D4=(0.75*1.32)=0.99

D5=(0.99*1.32)=1.3068

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

=(1.3068*1.06)/(0.14-0.06)

=17.3151

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

=0.75/1.14^3+0.99/1.14^4+1.3068/1.14^5+17.3151/1.14^5

=$10.76(Approx)

jeff jeffy answered 2 years ago
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