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 \$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.

\$ ____

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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