Question

Excel Online Structured Activity: 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 $0.75 coming 3 years from today. The dividend should grow rapidly - at a rate of 30% per year during Years 4 and 5; but after Year growth should be a constant 4% per year. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below. Open spreadsheet If the required return on Computech is 12%, what is the value of the stock today? Round your answer to the nearest cent. Do not round your intermediate calculations. $ Check My Work Reset Problem

Answer 1

Year	Dividends	g	1+r	PVIF
1			1.12
2
3	0.75			0.71178
4	0.975	30%		0.635518
5	1.2675	30%		0.567427
6	1.3182	4%		0.506631

Value of the stock today = present value of future cash flows

= present value of D3 + D4 + D5 + D6 + P6

Now P6 = D6*(1+g)/(r-g) = 1.3182*1.04/(0.12-0.04) = 17.1366

Also present value = cash flow *PVIF. PVIF values have been shown in the table able. Note that PVIF = 1/1.12^n

Thus value of stock today = 0.75*0.71178 + 0.975*0.635518 + 1.2675*0.567427 + 1.3182*0.506631 + 17.1366*0.506631

= $11.22

Thus value of stock today = $11.22