Nonconstant growth Microtech Corporation is expanding rapidly and currently need

Question

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 $1.00 coming 3 years from today. The dividend should grow rapidly - at a rate of 34% per year - during Years 4 and 5; but after Year 5, growth should be a constant 9% per year. If the required return on Microtech is 13%, what is the value of the stock today? Round your answer to the nearest cent.

$  

Explanation / Answer

Now as per the question

D1 =0

D2 =0

D3 =1

D4 = 1*1.34 = 1.34

D5 = 1,34*1.34 = 1.7956

D6 = 1.7956*1.09 = 1.957204

Now as per Dividend growth model

Ke = D6/P5 + g

Ke = 0.13

g = 0.09

D6 = 1.957204

P5 = ?

So 0.13 = 1.957204/P5 + 0.09

P5 = Price in year 5 = 48.93

Now to find p0 we discount it for 5 years and add the PV of the three dividends in years 3,4 and 5

That would be P0 = 48.93/1.13^5 + 1+1 +1 (the three 1's are the PV of dividends in years 3,4, and 5)

So that yould be 26.56 + 3 = $29.56

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