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 $1.25 coming 3 years from today. The dividend should grow rapidly-at a rate of 39% per year-during Years 4 and 5; but after Year 5, growth should be a constant 8% per year. If the required return on Computech is 14%, what is the value of the stock today? Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

Dividend in Year-3 = 1.25
Dividend in Year-4 = 1.25 +39% = 1.74
Dividend in Yeara-5 = 1.74+39% = 2.42
Dividend for Year-6 = 2.42 +8% = 2.61
Horizon value at Year-5 = 2.61 / (14-8)% = 43.50
Stock price:
Year	Cashflows	PVF at 14%	Present value
1	0	0.877193	0
2	0	0.769468	0
3	1.25	0.674972	0.843714
4	1.74	0.59208	1.03022
5	2.42	0.519369	1.256872
5	43.5	0.519369	22.59254
Stock price today			25.72