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 \$1.25 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.

 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

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