Assignment Smre: 50.00% gnment: M4 Homework Save Submit Assignment for Grading Q

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Assignment Smre: 50.00% gnment: M4 Homework Save Submit Assignment for Grading Question!7of20, ions Problem 9.14 Check My Work Click here to read the eBook: Valuing Nonconstant Growth Stocks Problem Walk-Through O NONCONSTANT GROWTH Computech Corparation 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, begining with a dividend of $1.75 coming 3 years from today. The dividend should grow rapidly-at a rate of 41% per ye Computech is 12%, what is the value of the stock today? Round your answer to the nearest cent. Do not round your intermediate calculations. ears 4 and : but t er Year , gro h shi d const n69% per ver. r he equired etumo ar-during e Check My Work loon Key Question 17 of 20 Problem 9.14

Explanation / Answer

Answer.

D3 = $1.7500
growth rate for 4th and 5th year is 41% and constant growth rate (g) is 9% thereafter

D4 = $1.7500 * 1.41 = $2.4675
D5 = $2.4675 * 1.41 = $3.4792
D6 = $3.4792 * 1.09 = $3.7923

Required return, r = 12%

P5 = D6 / (r - g)
P5 = $3.7923 / (0.12 - 0.09)
P5 = $3.7923 / 0.03
P5 = $126.4100

P0 = D3/(1+r)^3 + D4/(1+r)^4 + D5/(1+r)^5 + P5/(1+r)^5
P0 = $1.7500/1.12^3 + $2.4675/1.12^4 + $3.4792/1.12^5 + $126.4100/1.12^5
P0 = $76.52

So, current price of stock is $76.52

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