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 $1.00 coming 3 years from today. Thedividend should grow rapidly - at a rate of 47% per year - duringYears 4 and 5, but after Year 5, growth should be a constant 8% peryear. If the required return on Computech is 12%, what is the valueof the stock today? Do not round intermediate calculations. Roundyour answer to the nearest cent. $

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4.1 Ratings (564 Votes)

As per dividend discount model, value of stock today is the present value of dividends.

Step-1:Present value of dividend upto year 5

Year	Dividend	Discount factor	Present value
a	b	c=1.12^-a	d=b*c
3	$ 1.00	0.71178	$ 0.71
4	$ 1.47	0.635518	$ 0.93
5	$ 2.16	0.567427	$ 1.23

Total			$ 2.87

Working:

Dividend of year:

4	$ 1.00	x	1.47	=	$ 1.47
5	$ 1.47	x	1.47	=	$ 2.16

step-2:Present value of dividend after year 5

Present value	=	D5(1+g)/(Ke-g)DF5			Where,
	=	$ 33.11			D5	Dividend of year 5	$ 2.16
					g	Growth rate	8%
					Ke	Required return	12%
					DF5	Discount factor of year 5	0.567427

Step-3:Present value of all dividends

Present value of all dividends	=	$ 2.87	+	$ 33.11
	=	$ 35.98

So, value of stock today is $ 35.98

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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 $1.00 coming 3 years from today. Thedividend should grow rapidly - at a rate of 47% per year - duringYears 4 and 5, but after Year 5, growth should be a constant 8% peryear. If the required return on Computech is 12%, what is the valueof the stock today? Do not round intermediate calculations. Roundyour answer to the nearest cent. $