Question

In: Finance

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

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