Answered

Westonci.ca is the best place to get answers to your questions, provided by a community of experienced and knowledgeable experts. Explore our Q&A platform to find in-depth answers from a wide range of experts in different fields. Our platform provides a seamless experience for finding reliable answers from a network of experienced professionals.

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

Visit us again for up-to-date and reliable answers. We're always ready to assist you with your informational needs. We appreciate your time. Please come back anytime for the latest information and answers to your questions. Thank you for using Westonci.ca. Come back for more in-depth answers to all your queries.