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 $1.75 coming 3 years from today. The dividend should grow rapidly-at a rate of 30% 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 18%, what is the value of the stock today? Round your answer to the nearest cent. Do not round your intermediate calculations.

Answer 1

Value of the stock at end of n th year=Dn(1+g)/(K-g)

Year 3 Dividend=$1.75

Year 4 dividend=$1.75*(1+Growth Rate)=$1.75*1.30=$2.275=$2.28

Year 5 dividend=$2.275*(1+Growth Rate)=$2.275*1.30=$2.957=$2.96

Stock Price at end of 5 the year=$2.96(1+0.06)/(0.18-0.06)=$26.15

the value of the stock today:

Year	Particulars	Cash Flow	PV@13%	PV $
1	Dividend	-	0.8475	-
2	Dividend	-	0.7182	-
3	Dividend	1.75	0.6086	1.07
4	Dividend	2.28	0.5158	1.18
5	Dividend	2.96	0.4371	1.29
5	Price of the stock at end of 5th year	26.15	0.4371	11.43
				14.97