Microtech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it...

Microtech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it does not pay dividends. However, investors expect Microtech to begin paying dividends, beginning with a dividend of $2.00 coming 3 years from today. The dividend should grow rapidly - at a rate of 36% per year - during Years 4 and 5; but after Year 5, growth should be a constant 6% per year. If the required return on Microtech is 12%, what is the value of the stock today? Round your answer to the nearest cent.

Solutions

Expert Solution

	Required rate=	12.00%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	0	0.00%	0		0	1.12	0
2	0	0.00%	0		0	1.2544	0
3	0	0.00%	2		2	1.404928	1.42356
4	2	36.00%	2.72		2.72	1.57351936	1.72861
5	2.72	36.00%	3.6992	99.878	103.5772	1.762341683	58.77248
	Long term growth rate (given)=	8.00%			Value of Stock =	Sum of discounted value =	61.92

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

jeff jeffy answered 1 year ago

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