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 $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.

$

Answer #1

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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