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 31% per year - during Years 4 and 5; but after Year 5, growth should be a constant 7% 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.

If the required return on Computech is 17%, what is the value of the stock today? Round your answer to the nearest cent. Do not round your intermediate calculations.

Answer 1

Calculation of stock's current price:
Year	Particulars	Amount	PVF @17%	Present value
1	Dividend	-	0.855	-
2	Dividend	-	0.731	-
3	Dividend	0.75	0.624	0.47
4	Dividend	0.98	0.534	0.52
5	Dividend	1.29	0.456	0.59
5	Terminal value	13.80	0.456	6.29
Total				7.87
So current price is $7.87
Working:
Calculation of dividend:
Year 4= Dividend(1+growth)= 0.75(1+0.31)=$0.98
Year 5= Dividend(1+growth)=0.98(1+0.31)=$1.29
Terminal value= Dividend(1+growth)/(return-growth)
=1.29(1+0.07)/0.17-0.07=1.3803/0.10=$13.80