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 $1.25 coming 3 years from today. The dividend should grow rapidly-at a rate of 19% per year-during Years 4 and 5; but after Year 5, growth should be a constant 6% per year. If the required return on Computech is 12%, 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=	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%	1.25		1.25	1.404928	0.88973
4	1.25	19.00%	1.4875		1.4875	1.57351936	0.94533
5	1.4875	19.00%	1.770125	31.272	33.042125	1.762341683	18.74899
	Long term growth rate (given)=	6.00%			Value of Stock =	Sum of discounted value =	20.58

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