Non Constant Growth Microtech Corporation is expanding rapidly and currently nee

Question

Non Constant Growth

Microtech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it does not pay dividends. However, investors expect Microtech to begin paying dividends, beginning with a dividend of $1.25 coming 3 years from today. The dividend should grow rapidly - at a rate of 49% per year - during Years 4 and 5; but after Year 5, growth should be a constant 10% per year. If the required return on Microtech is 12%, what is the value of the stock today? Round your answer to the nearest cent.

Explanation / Answer

Hi,

Please find the answer as follows:

D3 = 1.25

D4 = 1.25*(1+.49)

D5 = 1.25*(1+.49)^2

D6 = 1.25*(1+.49)^2*(1+.10)

P5 = 1.25*(1+.49)^2*(1+.10)/(.12 - .10)

Value of Stock Today = 1.25/(1+.12)^3 + 1.25*(1+.49)/(1+.12)^4 + 1.25*(1+.49)^2/(1+.12)^5 + 1.25*(1+.49)^2*(1+.10)/(.12 - .10)*(1+.12)^5 = $98.92 or $98.90

Answer is $98.92 or $98.90.

Thanks.

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