chapter 9 3. Nonconstant growth Microtech Corporation is expanding rapidly and c
ID: 2643423 • Letter: C
Question
chapter 9
3. Nonconstant growth
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 $1.25 coming 3 years from today. The dividend should grow rapidly - at a rate of 39% per year - during Years 4 and 5; but after Year 5, growth should be a constant 8% per year. If the required return on Microtech is 12%, what is the value of the stock today? Round your answer to the nearest cent.
=$
Explanation / Answer
Answer:
D3 = 1.25
D4 = 1.25*1.39 = 1.7375
D5 = 1.7375*1.39 = 2.415
calculating present value of expected dividends
= $1.25(1.12)3 + $1.7375/(1.12)4 + $2.415/(1.12)5
= 3.36
Compute D6 = 2.415 (1.08) = 2.608;
Then P5 = D6 /(r - g) = 2.608 / (0.12 - 0.08) = $65.208
Calculate the PV of P5 = $65.208/(1.12)5 = $37
Sum the two PVs to obtain the stock
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