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 $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.

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

Computech Corporation is expanding rapidly and currently needs
to retain all of its earnings; hence, it does not pay dividends.
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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
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Computech Corporation is expanding rapidly and currently needs
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dividend should grow rapidly - at a rate of 41% per year - during
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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 27% per year-during Years
4 and 5; but after Year 5, growth should be a constant 9% per year.
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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 $2.00 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...

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 23% 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 14%, what is the value of the...

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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
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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.
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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
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to retain all of its earnings; hence, it does not pay dividends.
However, investors expect Computech to begin paying dividends,
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