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

Answer #1

**The value of the stock is computed as shown
below:**

**= Dividend in year 3 / (1 + required rate of
return) ^{3} + Dividend in year 4 / (1 + required rate of
return)^{4} + Dividend in year 5 / (1 + required rate of
return)^{5} + 1 / (1 + required rate of return)^{5}
[ (Dividend in year 5 (1 + growth rate) / ( required rate of return
- growth rate ) ]**

= $ 2 / 1.18^{3} + ( $ 2 x 1.20 ) / 1.18^{4} + (
$ 2 x 1.20^{2} ) / 1.18^{5} + 1 / 1.18^{5}
[ ($ 2 x 1.20^{2} x 1.05) / ( 0.18 - 0.05) ]

= $ 2 / 1.18^{3} + $ 2.40 / 1.18^{4} + $ 2.88 /
1.18^{5} + $ 23.26153846 / 1.18^{5}

**= $ 13.88 Approximately**

Feel free to ask in case of any query relating to this question

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