NONCONSTANT GROWTH Computech Corporation is expanding rapidly and currently need
ID: 2618159 • Letter: N
Question
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 $1.75 coming 3 years from today. The dividend should grow rapidly-at a rate of 20% per year-during Years 4 and 5; but after Year 5, growth should be a constant 9% per year. If the required return on Computech is 17%, what is the value of the stock today? Round your answer to the nearest cent. Do not round your intermediate calculations.
$
Explanation / Answer
D4=(1.75*1.2)=$2.1
D5=(2.1*1.2)=$2.52
Value after year 5=(D5*Growth rate)/(Required return-Growth rate)
=(2.52*1.09)/(0.17-0.09)=$34.335
Hence value of stock today=Future dividends*Present value of discounting factor(17%,time period)
=1.75/1.17^3+2.1/1.17^4+2.52/1.17^5+34.335/1.17^5
which is equal to
=$19.02(Approx).
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