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 $1.50 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? Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

Price of the shares = 1.50 / 1.14³ + [ ( 1.50 * 1.23 ) / 1.14⁴ ] + [ ( 1.50 * 1.23² ) / 1.14⁵ ] + [ ( 1.50 * 1.23² * 1.10 ) / ( 0.23 - 0.10 ) * 1.14⁵ ]

                            = 1.0125 + 1.0924 + 1.1786 + 9.9730

                            = $ 13.26 Answer