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 \$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 the value of the stock today? Do not round intermediate calculations. Round your answer to the nearest cent.

#### Homework Answers

Answer #1

Statement showing price of stock today

 Year Dividend PVIF @ 18% PV 1 0.8475 0.00 2 0.7182 0.00 3 2 0.6086 1.22 4 2(1.37) 2.74 0.5158 1.41 5 2.74(1.37) 3.75 0.4371 1.64 Horizon Value 51.56 0.4371 22.54 Price of stock today 26.81

Thus price of stock today = \$ 26.81

i,e \$ 27

Horizon Value = Dividend for year 6 / Required rate of return - growth rate

growth rate = 10%

Required rate of return = 18%

Dividend for year 6 = Dividend for year 5(1+ growth rate)

= 3.75(1+10%)

=3.75(1.1)

=4.13

Thus Dividend for year 6 = 4.13/18%-10%

=4.13/8%

= \$ 51.56

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