NONCONSTANT GROWTH Computech Corporation is expanding rapidly and currently need

Question

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 $2.00 coming 3 years from today. The dividend should grow rapidly-at a rate of 50% per year-during Years 4 and 5; but after Year 5, growth should be a constant 10% per year. If the required return on Computech is 17%, what is the value of the stock today? Round your answer to the nearest cent. Do not round your intermediate calculations. S 28.01 Hide Feedback Incorrect

Explanation / Answer

D3=$2

D4=(2*1.5)=$3

D5=(3*1.5)=$4.5

Value after year 5=(D5*Growth rate)/(Required return-Growth rate)

(4.5*1.1)/(0.17-0.1)

=$70.71428571(Approx)

Hence current price=Future dividends*Present value of discounting factor(17%,time period)

=2/1.17^3+3/1.17^4+4.5/1.17^5+70.71428571/1.17^5

which is equal to

=$37.16(Approx).

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