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 $1.00 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 6% per year. If the required return on Computech is 18%, what is the value of the stock today? Round your answer to the nearest cent. Do not round your intermediate calculations.

$

Answer #1

**Step-1, Dividend per share for Years
3,4 and 5**

Dividend in Year 3 (D3) = $1.00 per share

Dividend in Year 4 (D4) = $1.20 per share [$1 x 120%]

Dividend in Year 5 (D5) = $1.44 per share [$1.20 x 120%]

**Step-2, Calculation of Stock Price in
Year 5 (P5)**

Stock Price in Year 5 = D5(1 + g) / (Ke – g)

= $1.44(1 + 0.06) / (0.18 – 0.06)

= $1.53 / 0.12

= $12.72 per share

**Step-3, Value of the
stock**

The value of the stock today is the aggregate of present value of future dividends and Stock Price in Year 5

Intrinsic Value = D3/(1 + Ke)^{3} + D4/(1 +
Ke)^{4} + D5/(1 + Ke)^{5} + P5/(1 +
Ke)^{5}

= $1.00/(1 + 0.18)^{3} + $1.20/(1 + 0.18)^{4} +
$1.44/(1 + 0.18)^{5} + $12.7/(1 + 0.18)^{5}

= [$1.00 / 1.64303] + [$1.20 / 1.93878] + [$1.44 / 2.28776] + [$12.72 / 2.28776]

= $0.61 + $0.62 + $0.63 + $5.56

= $7.42 per share

**“Therefore, the value of the stock today = $7.42 per
share”**

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 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 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 18% 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 14%, what is the value of
the...

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 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 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...

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 37% 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 18%, what is...

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 41% 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 18%, what is...

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 40% per year - during
Years 4 and 5, but after Year 5, growth should be a constant 4% 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 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...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 1 minute ago

asked 2 minutes ago

asked 4 minutes ago

asked 6 minutes ago

asked 49 minutes ago

asked 54 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago