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 \$1.75 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.

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 / 1.133 + (\$ 1.75 x 1.47) / 1.134 + (\$ 1.75 x 1.472) / 1.135 + 1 / 1.135 x [ (\$ 1.75 x 1.472 x 1.08) / (0.13 - 0.08) ]

= \$ 1.75 / 1.133 + \$ 2.5725 / 1.134 + \$ 3.781575 / 1.135 + 1 / 1.135 x [ (\$ 8.168202) ]

= \$ 1.75 / 1.133 + \$ 2.5725 / 1.134 + \$ 85.463595 / 1.135

= \$ 49.18 Approximately

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