Question

Computech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it does not pay divideends. 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 5% per year. If the required return on Computech is 16%, what is the value of the stock today? Do not round intermediate calculations. Round your answer to the nearest cent

Answer 1

Dividend for year 3=$0.5

Dividend for year 4=($0.5*1.24)=$0.62

Dividend for year 5=($0.62*1.24)=$0.7688

Value after year 5=(Dividend for year 5*Growth rate)/(Required rate of return-Growth rate)
= ($0.7688 * 1.05) / (0.16 - 0.05)
= $7.338545455

Current value of stock = (0.50/1.16^3) + (0.62/1.16^4) + (0.7688/1.16^5) + (7.338545455/1.16^5)
= 4.5228% or 5%