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 $1.75 coming 3 years from today The dividend should grow rapidly-at a rate of 42% 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

Dividend in

Year 3: 1.75

Year 4: 1.75*1.42=2.485

Year 5: 2.485*1.42=3.5287

Year 6: 3.5287*1.04=3.669848

Year 7: 3.669848*1.04=3.816642

so on

Terminal Value from year 7: D8/(r-g)=3.816642/(0.14-0.04)=38.16642

Present Value of Dividends=1.75/1.14^3+2.485/1.14^4+3.5287/1.14^5+3.669848/1.14^6+38.16642/1.14^6=23.54526

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.