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 47% per year - during Years 4 and 5; but after Year 5, growth should be a constant 8% per year.

Open spreadsheet If the required return on Computech is 13%, what is the value of the stock today? Round your answer to the nearest cent. Do not round your intermediate calculations.

Answer #1

**The value of the stock is computed as shown
below:**

**=** **Dividend in year 3 / (1 + required
rate of return)**^{3}**+
Dividend in year 4 / (1 + required rate of
return)**^{4}**+ Dividend in
year 5 / (1 + required rate of
return)**^{5}**+ 1 / (1 +
required rate of return)**^{5}**[ ( Dividend in year 5 (1 + growth rate) / ( required rate
of return - growth rate) ]**

= $ 1.75 / 1.13^{3} + ($ 1.75 x 1.47) / 1.13^{4}
+ ($ 1.75 x 1.47^{2}) / 1.13^{5} + 1 /
1.13^{5} x [ ($ 1.75 x 1.47^{2} x 1.08) / (0.13 -
0.08) ]

= $ 1.75 / 1.13^{3} + $ 2.5725 / 1.13^{4} + $
3.781575 / 1.13^{5} + 1 / 1.13^{5} x [ ($ 8.168202)
]

= $ 1.75 / 1.13^{3} + $ 2.5725 / 1.13^{4} + $
85.463595 / 1.13^{5}

**= $ 49.18 Approximately**

Feel free to ask in case of any query relating to this question

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