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 $1.75 coming 3 years from today. The dividend should grow rapidly - at a rate of 19% 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%, what is the value of the stock today? Do not round intermediate calculations. Round your answer to the nearest cent.

Answer #1

Year 3 dividend = 1.75

Year 4 dividend = 1.75 (1 + 19%) = 2.0825

Year 5 dividend = 2.0825 (1 + 19%) = 2.478175

Year 6 dividend = 2.478175 (1 + 1%) = 2.725993

Value in year 5 = Year 6 dividend / required rate - growth rate

Value in year 5 = 2.725993 / 0.12 - 0.1

Value in year 5 = 2.725993 / 0.02

Value in year 5 = 136.299625

Value of stock today = Present value of cash inflows

Present value = Future value / (1 + rate)^time

Value of stock today = 1.75 / (1 + 0.12)^3 + 2.0825 / (1 + 0.12)^4 + 2.478175 / (1 + 0.12)^5 + 136.299625 / (1 + 0.12)^5

**Value of stock today = $81.32**

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