chapter 9 3. Nonconstant growth Microtech Corporation is expanding rapidly and c
ID: 2642817 • Letter: C
Question
chapter 9
3. Nonconstant 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 $1.25 coming 3 years from today. The dividend should grow rapidly - at a rate of 39% per year - during Years 4 and 5; but after Year 5, growth should be a constant 8% per year. If the required return on Microtech is 12%, what is the value of the stock today? Round your answer to the nearest cent.
=$
Explanation / Answer
Years 0 1 2 3 4 5 Dividend Values 1.25 1.7375 2.415125 Terminal Value 65.20838 Total Value 1.25 1.7375 67.6235 PV of Total Value 28.74 Value of Stock discounting at 12% 28.74
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