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 49% per year-during Years 4 and 5; but after Year 5, growth should be a constant 4% per year. If the required return on Computech is 15%, what is the value of the stock today? Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

	Required rate=	15.00%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	0	0.00%	0		0	1.15	0
2	0	0.00%	0		0	1.3225	0
3	0	0.00%	0.75		0.75	1.520875	0.49314
4	0.75	49.00%	1.1175		1.1175	1.74900625	0.64
5	1.1175	49.00%	1.665075	15.743	17.408075	2.011357188	8.65
	Long term growth rate (given)=	4.00%			Value of Stock =	Sum of discounted value =	9.79

Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year
Unless dividend for the year provided
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 5 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor