Computech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it...

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Computech Corporation is expanding rapidly and currently needsto retain all of its earnings; hence, it does not pay dividends.However, investors expect Computech to begin paying dividends,beginning with a dividend of $1.75 coming 3 years from today. Thedividend should grow rapidly - at a rate of 42% per year - duringYears 4 and 5; but after Year 5, growth should be a constant 6% peryear. The data has been collected in the Microsoft Excel Onlinefile below. Open the spreadsheet and perform the required analysisto answer the question below.
If the required return on Computech is 15%, what is the value ofthe stock today? Round your answer to the nearest cent. Do notround your intermediate calculations.

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4.1 Ratings (861 Votes)

D3 = 1.75. D4 = 1.75*(1+42%) = 2.4850 and D5 = 2.4850*(1+42%) = 3.5287. D6 = 3.5287*(1+6%) = 3.7404

Terminal value at the end of year 5 = D6/r-g = 3.7404/(15%-6%) = 41.5602

Thus value of stock today = D3/(1+r)^3 + D4/(1+r)^4 + D5/(1+r)^5 + Terminal value/(1+r)^5

= 1.75/1.15^3 + 2.4850/1.15^4 + 3.5287/1.15^5 + 41.5602/1.15^5

= $24.99

The excel work can be seen below:

Year	Dividend	growth rate	1+r	PVIF	PV = dividend * PVIF
3	1.7500		1.15	0.6575	1.15
4	2.4850	42%		0.5718	1.42
5	3.5287	42%		0.4972	1.75
6	3.7404	6%
Terminal value	41.5602			0.4972	20.66

				Total = sum of present values of dividends of years 3 to 5 and terminal value	24.99

Thus value of stock today is $24.99

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Transcribed Image Text

Computech Corporation is expanding rapidly and currently needsto retain all of its earnings; hence, it does not pay dividends.However, investors expect Computech to begin paying dividends,beginning with a dividend of $1.75 coming 3 years from today. Thedividend should grow rapidly - at a rate of 42% per year - duringYears 4 and 5; but after Year 5, growth should be a constant 6% peryear. The data has been collected in the Microsoft Excel Onlinefile below. Open the spreadsheet and perform the required analysisto answer the question below.If the required return on Computech is 15%, what is the value ofthe stock today? Round your answer to the nearest cent. Do notround your intermediate calculations.