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

Answer 1

Value of the stock using dividend discount model :

Discounting the dividend received in various years with the required rate of return and considering the constant growth the formula is

Value = D3/(1+Re)^3. + D3(1.41)/(1+Re)^4 + D3(1.41)^2/(1+Re)^5 + (D5/Re-g)^6

Where Dn represents respective years dividends.

Re = Required Rate of return

g= Growth rate

= 2/(1+0.18)^3 + 2(1.41)/(1+0.18)^4 + 2(1.41)(1.41)/(1+0.18)^5 +{ 2(1.41)(1.41)/0.18-0.10}^6

= 1.2173 + 1.4545 + 1.7380 + 18.4113

= $ 22.82