Computech Corporation is expanding rapidly and currently needs to retain all of

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 37% 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 14%, what is the value of the stock today? Round your answer to the nearest cent. Do not round your intermediate calculations.

$

Explanation / Answer

D3=$1.5

D4=(1.5*1.37)=$2.055

D5=(2.055*1.37)=$2.81535

Value after year 5=(D5*Growth rate)/(Required return=Growth rate)

=(2.81535*1.04)/(0.14-0.04)

=$29.27964

Hence current value=Future dividends*Present value of discounting factor(14%,time period)

=$1.5/1.14^3+$2.055/1.14^4+$2.81535/1.14^5+$29.27964/1.14^5

which is equal to

=$18.90(Approx).

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