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 $0.50 coming 3 years from today. The dividend should grow rapidly - at a rate of 38% per year - during Years 4 and 5; but after Year 5, growth should be a constant 6% 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 13%, what is the value of the stock today? Round your answer to the nearest cent. Do not round your intermediate calculations.

Answer 1

	Required rate=	13.00%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	0	0.00%	0		0	1.13	0
2	0	0.00%	0		0	1.277	0
3	0	0.00%	0.5		0.5	1.443	0.3465
4	0.5	38.00%	0.69		0.69	1.63	0.42331
5	0.69	38.00%	0.9522	14.419	15.3712	1.842	8.34484
	Long term growth rate (given)=	6.00%			Value of Stock =	Sum of discounted value =	9.11

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