Question

# NONCONSTANT GROWTH Computech Corporation is expanding rapidly and currently needs to retain all of its earnings;...

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

g1 = growth rate in year 4 and 5 = 0.21 , g2 = growth rate after year 5, Ke = required return = 0.12

D3 (Dividend in Year 3) = \$0.50

D4 (Dividend in Year 4) = D3 x (1 + g1) = \$0.50 x (1 + 0.21) = \$0.605

D5 (Dividend in Year 5) = D4 x (1 + g1) = \$0.605 x (1 + 0.21) = \$0.73205

P5 (Price at the end of year 5) = D5 x (1 + g2) / (Ke - g2) = \$0.73205 x (1 + 0.08) / (0.12 - 0.08) = \$19.76535

Value of stock today is the present value of the above cash flows -

 Particulars Year PVIF@12% Amount Present value D3 3 0.7117802478 \$0.50 \$0.36 D4 4 0.63551807839 \$0.605 \$0.38 D5 5 0.5674268557 \$0.73205 \$0.42 P5 5 0.5674268557 \$19.76535 \$11.21 Value of stock today \$12.37

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