NONCONSTANT GROWTH Computech Corporation is expanding rapidly and currently need
ID: 2822508 • Letter: N
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 $0.50 coming 3 years from today. The dividend should grow rapidly-at a rate of 24% per year-during Years 4 and 5; but after Year 5, growth should be a constant 6% per year. If the required return on Computech 1496, what is the value of the stock today? Round your answer to the nearest cent. Do not round your intermediate calculations.Explanation / Answer
Year
Cash flow
Present Value Factor@14%
Discounted Cash flow
Year 3
Given – Dividend
0.50
0.67497
0.34
Year 4
Dividend = 0.50 * 124%
0.62
0.59208
0.36
Year 5
Dividend = 0.62 * 124%
0.7688
0.51937
0.40
Year 5
Price (Refer Note 1 below)
10.1866
0.51937
5.29
6.39
Value of Stock today = $6.39
Note 1
Price on year 5 = Dividend of Year 5 * (1+growth rate) / Required rate of return – growth rate
= 0.7688 *(1+0.06) / 0.14-0.06
=0.814928 / 0.08 = 10.1866
Year
Cash flow
Present Value Factor@14%
Discounted Cash flow
Year 3
Given – Dividend
0.50
0.67497
0.34
Year 4
Dividend = 0.50 * 124%
0.62
0.59208
0.36
Year 5
Dividend = 0.62 * 124%
0.7688
0.51937
0.40
Year 5
Price (Refer Note 1 below)
10.1866
0.51937
5.29
6.39
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