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 $1.50 coming 3 years from today. The dividend should grow rapidly - at a rate of 26% per year - during Years 4 and 5, but after Year 5, growth should be a constant 7% per year. If the required return on Computech is 16%, 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 ) ]

= $ 1.50 / 1.16³ + ( $ 1.50 x 1.26 ) / 1.16⁴ + ( $ 1.50 x 1.26² ) / 1.16⁵ + 1 / 1.16⁵ [ ($ 1.50 x 1.26² x 1.07) / ( 0.16 - 0.07) ]

= $ 1.50 / 1.16³ + $ 1.89 / 1.16⁴ + $ 2.3814 / 1.16⁵ + $ 28.3122 / 1.16⁵

= $ 16.62 Approximately

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