NONCONSTANT GROWTH Computech Corporation is expanding rapidly and currently need

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 rap dly at a rate of 41% per year during Years 4 and 5: but after Year growth Should be a constant 9% per year. If the required retu on Computech s 15% what s the value of the stock today? Round your answer to the nearest cent. Do not round your intermediate calculations.

Explanation / Answer

Using dividend discount model, value of stock is the present value of dividends.

Since dividends grow at a constant rate from year 6, Value of stock is calculated at year 6 and then discounted back to year 0 along with dividends for year 3-5.

Step 1: Stock price at the beginning of year 6= D6/(Ke-g)

Dividend for year6= 1.75* 1.41* 1.41* 1.09= 3.479

Stock price at the beginning of year 5 Growth g 9% Required return Ke 15% Stock price Y5(D6/(ke-g) 63.21

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