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 $0.75 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. 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.

Open spreadsheet

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.

$  

Answer 1

Stock price today = $12.56

Horizon Value = year 5 dividend * (1 + constant Growth) / (required rate - Growth Rate)

Horizon Value = 1.21 * (1.09) / 15%-9%

Horizon Value = $21.98