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 \$2.00 coming 3 years from today. The dividend should grow rapidly-at a rate of 23% per year-during Years 4 and 5; but after Year 5, growth should be a constant 10% per year. If the required return on Computech is 14%, what is the value of the stock today? Round your answer to the nearest cent. Do not round your intermediate calculations.

\$

present value factor = 1 /(1+r)^n

here,

r = 14%=>0.14

n= number of the year

 year cash flow present value factor cash flow* present value factor 3 \$2 1/(1.14)^3=>0.674972 (\$2*0.674972)=>\$1.349944 4 \$2+23%=>\$2.46 1/(1.14)^4=>0.592080 (\$2.46*0.592080)=>\$1.4565168 5 \$2.46+23%=>\$3.0258 1/(1.14)^5=>0.519369 (\$3.0258*0.519369)=>\$1.571507 5 \$83.2095 1/(1.14)^5=>0.519369 (\$83.2095*0.519369)=>\$43.216435 value of the stock \$47.59.

note;

horizon value at end of year 5 = dividend of year 5*(1+growth rate) / (required return - growth rate)

=> \$3.0258 *(1+0.10) /(0.14-0.10)

=>\$3.0258*(1.10)/0.04

=>\$83.2095

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