e Questioe 17 of 20 Questions Problem 9.14 Check My Work (3 remaining) 15. C Cli

Question

e Questioe 17 of 20 Questions Problem 9.14 Check My Work (3 remaining) 15. C Click here to read the eBook: Valuing Nonconstant Growth Stocks 17 Problem Walk-Through O NONCONSTANT GROWTH s expanding rapidly and currently needs to retain all of its Computech Corporation 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 26% per year-during Years 4 and 5; but after Year 5, growth should be a constant 7% 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 20 O Check My Work (3 remaining) F888 2 3 4 5 6

Explanation / Answer

Solution:

There are two years of non constant growth where t = 2. Let us calculate the dividend for years from 1through 4:

D1 = 1.50

D2 = 1.50

D3 = 1.50

D4 = 1.50(1 +25) = 1.875 = 1.88

D5 = 1.875(1 +25) = 2.34375 = 2.34

D6 = 2.34375(1+ 0.07) = 2.51

P0 = 1.50/(1+12%)^1 +1.50/(1+12%)^2 +1.50/(1+12%)^3 +1.88/(!+12%)^4 +2.34/(1+12%)^5 + 2.51/12 – 0.07) (1+ 0.12)^-2

= 1.34 + 1.20 + 1.07 + 1.19 + 1.33 + (50.2)(0.79719)

= 1.34 + 1.20 + 1.07 +1.19 + 1.33 + 40.01

= $46.14

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