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 $1.25 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 of the stock today? Round your answer to the nearest cent. Do not round your intermediate calculations.

$____

Answer #1

This is a problem from two phase dividend growth model - | |||||||

Step 1 - | Explicit forecast period = | ||||||

Year | Dividend | PV factor @ 17% | PV of Dividends | ||||

1 | 0 | 0.8547 | 0.0000 | ||||

2 | 0 | 0.7305 | 0.0000 | ||||

3 | 1.25 | 0.6244 | 0.7805 | ||||

4 | 1.25 x 1.44 = | 1.8 | 0.5337 | 0.9606 | |||

5 | 1.8 x 1.44 = | 2.592 | 0.4561 | 1.1822 | |||

2.9233 | |||||||

Step 2 - | Horizon period = | ||||||

Terminal value at t=5 | |||||||

= | D6/(Re - g) | ||||||

here, D6 = | Dividend for the year 6 | = 2.592 x 1.09 = | 2.82528 | ||||

Re = | required return | 17% | |||||

g = | growth (Constant) | 9% | |||||

Terminal value(Or price at t=5) = | 2.82528/(0.17-0.09) | ||||||

35.316 | |||||||

PV of terminal value = | Terminal value x PV factor for 5 years | ||||||

35.316 x 0.4561 | |||||||

16.10802 | |||||||

Step 3 = | Value of stock today = | Step 1 + step 2 | |||||

= | 2.9233 + 16.1080 | ||||||

19.0313 | |||||||

Answer | |||||||

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%,...

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 $1.00 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%,...

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 43% per year-during Years
4 and 5; but after Year 5, growth should be a constant 4% per year.
If the required return on Computech is 12%, 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 $1.25 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...

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 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 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...

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 37% per year - during
Years 4 and 5, but after Year 5, growth should be a constant 10%
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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 41% 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 18%, what is...

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