Question

Microtech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it does not pay dividends. However, investors expect Microtech 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 5% per year. If the required return on Microtech is 16%, what is the value of the stock today? Round your answer to the nearest cent.

Answer 1

Value of stock = present value of dividends from Years 3 to 5 + present value of terminal value at end of Year 5

Terminal value at end of Year 5 = Year 5 dividend * (1 + growth rate after Year 5) / (required return - growth rate after Year 5)

Present value = future value / (1 + required return)number of years

The value of stock today = $11.55

The value of stock today = $11.55