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 $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.

Answer #1

**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 / 1.12^{3} + ($ 0.50 x 1.40) / 1.12^{4}
+ ($ 0.50 x 1.40^{2}) / 1.12^{5} + 1 /
1.12^{5} x [ (($ 0.50 x 1.40^{2} x 1.04) / (0.12 -
0.04) ]

= $ 0.50 / 1.12^{3} + $ 0.70 / 1.12^{4} + $ 0.98
/ 1.12^{5} + 1 / 1.12^{5} x [ ($ 12.74) ]

= $ 0.50 / 1.12^{3} + $ 0.70 / 1.12^{4} + $
13.72 / 1.12^{5}

**= $ 8.59 Approximately**

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

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