e Questioe 17 of 20 Questions Problem 9.14 Check My Work (3 remaining) 15. C Cli
ID: 2620120 • Letter: E
Question
e Questioe 17 of 20 Questions Problem 9.14 Check My Work (3 remaining) 15. C Click here to read the eBook: Valuing Nonconstant Growth Stocks 17 Problem Walk-Through O NONCONSTANT GROWTH s expanding rapidly and currently needs to retain all of its Computech Corporation earnings; hence, it does not pay dividends. However, investors expect Computech to begin paying dividends, beginning with a dividend of $1.50 coming 3 years from today. The dividend should grow rapidly-at a rate of 26% per year-during Years 4 and 5; but after Year 5, growth should be a constant 7% per year. 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 20 O Check My Work (3 remaining) F888 2 3 4 5 6Explanation / Answer
Solution:
There are two years of non constant growth where t = 2. Let us calculate the dividend for years from 1through 4:
D1 = 1.50
D2 = 1.50
D3 = 1.50
D4 = 1.50(1 +25) = 1.875 = 1.88
D5 = 1.875(1 +25) = 2.34375 = 2.34
D6 = 2.34375(1+ 0.07) = 2.51
P0 = 1.50/(1+12%)^1 +1.50/(1+12%)^2 +1.50/(1+12%)^3 +1.88/(!+12%)^4 +2.34/(1+12%)^5 + 2.51/12 – 0.07) (1+ 0.12)^-2
= 1.34 + 1.20 + 1.07 + 1.19 + 1.33 + (50.2)(0.79719)
= 1.34 + 1.20 + 1.07 +1.19 + 1.33 + 40.01
= $46.14
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