Question

Nonconstant growth

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 $1.00 coming 3 years from today. The dividend should grow rapidly - at a rate of 21% per year - during Years 4 and 5; but after Year 5, growth should be a constant 5% per year. If the required return on Computech is 16%, 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 (PV) = sum of present value of all future cash flows

Assuming returns are generated from dividends only,

After end of 5 years there is a perpetuity model with constant dividend growth which can be calculated using the formula Dividend * (1+ dividend growth rate)/ (return rate - growth rate) which needs to be discounted back from year 5 to year 0 (present value)

PV = 2/(1+16%)^3+2*(1+21%)/(1+16%)^4+2*(1+21%)^2/(1+16%)^5+2*(1+21%)^2*(1+5%)/(16%-5%)/(1+16%)^5=$17.32

Nonconstant growth 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 $1.00 coming 3 years
from today. The dividend should grow rapidly - at a rate of 18% 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 12%,...

NONCONSTANT GROWTH 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 21% 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 12%,
what is the value...

NONCONSTANT GROWTH
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 44% per year-during Years
4 and 5; but after Year 5, growth should be a constant 9% per year.
If the required return on Computech is 17%, what is the value...

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 $1.00 coming 3 years from today. The
dividend should grow rapidly-at a rate of 42% 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 15%, what is the value of
the...

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 $1.00 coming 3 years from today. The
dividend should grow rapidly-at a rate of 46% per year-during Years
4 and 5; but after Year 5, growth should be a constant 5% per year.
If the required return on Computech is 15%, what is the value of
the...

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 $1.00 coming 3 years from today. The
dividend should grow rapidly-at a rate of 18% per year-during Years
4 and 5; but after Year 5, growth should be a constant 9% per year.
If the required return on Computech is 14%, what is the value of
the...

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 $1.00 coming 3 years from today. The
dividend should grow rapidly-at a rate of 28% per year-during Years
4 and 5; but after Year 5, growth should be a constant 9% per year.
If the required return on Computech is 15%, what is the value of
the...

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 $1.00 coming 3 years from today. The
dividend should grow rapidly-at a rate of 20% per year-during Years
4 and 5; but after Year 5, growth should be a constant 6% per year.
If the required return on Computech is 18%, what is the value of
the...

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 $1.50 coming 3 years from today. The
dividend should grow rapidly-at a rate of 29% per year-during Years
4 and 5; but after Year 5, growth should be a constant 5% per year.
If the required return on Computech is 18%, what is the value of
the...

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 20% per year - during
Years 4 and 5, but after Year 5, growth should be a constant 5% per
year. If the required return on Computech is 18%, what is...

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