Question

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

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 15% per year-during Years 4 and 5; but after Year 5, growth should be a constant 5% per year. If the required return on Computech is 15%, what is the value of the stock today? Round your answer to the nearest cent. Do not round your intermediate calculations.

Homework Answers

Answer #1

The formula for dividend discount model is below:

Intrinsic value = PV of high growth phase dividends + PV of stable growth phase dividends

Where,

Dn = Dividend in the given year

r = cost of equity

Since the first divident will be paid in year 3,

The PV of dividend paid in year 3 will be

PV = 1.5 / (1.15^3) = $0.9862

Now in 4th and 5th year the dividen growth is 15%

Hence, PV in 4th year = 1.5*(1.15) / (1.15^4) = 1.725 / (1.15^4) = $0.98625

PV in 5th yr = 1.7255*(1.15) / (1.15^5) = 1.98375 / (1.15^5) = $0.98625

Now, in terminal year the PV will be = (1.98375 * (1.05) / (0.15 - 0.05)) / (1.15^5) = $10.3754

Therefore,

PV or current market price = $0.9862 +$0.9862 +$0.9862 + $10.3754

= $13.334

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Computech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it...
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 29% per year-during Years 4 and 5; but after Year 5, growth should be a constant 5% per year. If the required return on Computech is 18%, what is the value of the...
Computech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it...
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 10% per year. If the required return on Computech is 14%, what is the value of the...
Computech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it...
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 26% per year - during Years 4 and 5, but after Year 5, growth should be a constant 7% per year. If the required return on Computech is 16%, what is...
Computech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it...
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 $2.00 coming 3 years from today. The dividend should grow rapidly-at a rate of 27% per year-during Years 4 and 5; but after Year 5, growth should be a constant 9% per year. If the required return on Computech is 15%, what is the value of the...
Computech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it...
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 $1.00 coming 3 years from today. The dividend should grow rapidly-at a rate of 42% 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 15%, what is the value of the...
Computech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it...
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 $1.00 coming 3 years from today. The dividend should grow rapidly-at a rate of 46% per year-during Years 4 and 5; but after Year 5, growth should be a constant 5% per year. If the required return on Computech is 15%, what is the value of the...
Computech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it...
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 $0.50 coming 3 years from today. The dividend should grow rapidly-at a rate of 17% per year-during Years 4 and 5; but after Year 5, growth should be a constant 5% per year. If the required return on Computech is 15%, what is the value of the...
Computech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it...
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 $1.00 coming 3 years from today. The dividend should grow rapidly-at a rate of 28% per year-during Years 4 and 5; but after Year 5, growth should be a constant 9% per year. If the required return on Computech is 15%, what is the value of the...
Computech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it...
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 $0.50 coming 3 years from today. The dividend should grow rapidly - at a rate of 15% 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...
Computech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it...
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 $2.00 coming 3 years from today. The dividend should grow rapidly - at a rate of 20% per year - during Years 4 and 5, but after Year 5, growth should be a constant 5% per year. If the required return on Computech is 18%, what is...