Question

Computech Corp. is expanding rapidly and currently needs to retain all of its earnings; hence, it does not pay dividends. However, investors expects 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 39% per year during years 4 and 5; but after year 5, growth should be constant 8% per year. If the required return on Computech is 14%, what is the value of stock today? Do not round intermidiate calculations. Round your answer to the nearest cent.

Answer 1

D3=1.5

D4=(1.5*1.39)=2.085

D5=(2.085*1.39)=2.89815

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

=(2.89815*1.08)/(0.14-0.08)

=52.1667

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

=1.5/1.14^3+2.085/1.14^4+2.89815/1.14^5+52.1667/1.14^5

=$30.85(Approx)