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 $2.00 coming 3 years from today. The dividend should grow rapidly - at a rate of 34% 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 14%, what is the value of the stock today? Round your answer to the nearest cent. Do not round your intermediate calculations.

Explanation / Answer

value of the stock today                     33.31 Statemnet showing Current Price Particulars Time PVf14% Amount PV Cash inflows (Dividend)                         1.00                  0.8772                            -   Cash inflows (Dividend)                         2.00                  0.7695                            -   Cash inflows (Dividend)                         3.00                  0.6750                  2.0000                       1.35 Cash inflows (Dividend)                         4.00                  0.5921                  2.6800                       1.59 Cash inflows (Dividend)                         5.00                  0.5194                  3.5912                       1.87 Cash inflows (Price)                       5.00                  0.5194                54.8941                     28.51 Current Price of Stock                     33.31 P5= D6/ke-g P5 = 3.5912*1.07/(14%-7%) P5 = 3.8426/7% P5 = 54.8941

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