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 $1.50 coming 3 years from today. The dividend should grow rapidly-at a rate of 23% per year-during Years 4 and 5; but after Year 5, growth should be a constant 8% per year. If the required return on Computech is 14%, 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	14.00%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	0	0%	0		0	1.14	0
2	0	0%	0		0	1.3	0
3	0	0%	1.5		1.5	1.482	1.01215
4	1.5	23%	1.845		1.845	1.689	1.09236
5	1.845	23%	2.26935	40.848	43.11735	1.925	22.39862
	Long term growth rate =	8%	#VALUE!		Value of Stock =	Sum of discounted value =	24.5

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 =	current Dividend 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