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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 $1.50 coming 3 years from today. The dividend should grow rapidly - at a rate of 31% 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

Sagot :

Answer: $17.42

Explanation:

Dividend at year 3, D3 = $1.50

D4 = $1.50 × 1.31 = $1.965

D5 = $1.965 × 1.31 = $2.57415

D6 = $2.57415 × 1.04 = $2.677116

P5 = D6/(r-g)

P5 = $2.677116 /(0.14 - 0.04)

= $2.677116 / 0.10

= $26.77116

Then, the the value of the stock today will be:

= 1.50/1.14³ + 1.965/1.14⁴ + (2.57415+26.77116)/1.14^5

= 1.0124573 + 1.1634377 + 15.241034

= 17.416929

= $17.42 Approximately

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