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 $1.75 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 4% 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 17%, what is the value of the stock today? Round your answer to the nearest cent. Do not round your intermediate calculations.

Answer 1

First Dividend is paid 3 Years from Current time, D3 = $ 1.75, Initial Growth Rate = 36% during Year 4 and Year 5

D4 = 1.75 x 1.36 = $ 2.38 and D5 = 2.38 x 1.36 = $ 3.2368

Growth Rate beyond Year 6 = 4 %, D6 = 3.2368 x 1.04 = $ 3.366272

Required Return = 17 %

Horizon Value of Perpetual Dividends = 3.366272 / (0.17-0.04) = $ 25.8944

Present Value of Horizon Value = P1= 25.8944 / (1.17)^(5) = $ 11.810725

Present Value of Initial Dividends = P2 = 1.75 / (1.17)^(3) + 2.38 / (1.17)^(4) + 3.2368 / (1.17)^(5) = $ 3.8390762

Current Stock Value = P1 + P2 = 11.810725 + 3.8390762 = $ 15.6498008 ~ $ 15.65