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 \$0.50 coming 3 years from today. The dividend should grow rapidly - at a rate of 40% per year - during Years 4 and 5, but after Year 5, growth should be a constant 4% per year. If the required return on Computech is 12%, what is the value of the stock today? Do not round intermediate calculations. Round your answer to the nearest cent.

The value 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 x [ (Dividend in year 5 x (1 + growth rate) / (required rate of return - growth rate) ]

= \$ 0.50 / 1.123 + (\$ 0.50 x 1.40) / 1.124 + (\$ 0.50 x 1.402) / 1.125 + 1 / 1.125 x [ ((\$ 0.50 x 1.402 x 1.04) / (0.12 - 0.04) ]

= \$ 0.50 / 1.123 + \$ 0.70 / 1.124 + \$ 0.98 / 1.125 + 1 / 1.125 x [ (\$ 12.74) ]

= \$ 0.50 / 1.123 + \$ 0.70 / 1.124 + \$ 13.72 / 1.125

= \$ 8.59 Approximately

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