Problem 9-14 Nonconstant growth Computech Corporation is expanding rapidly and c

Question

Problem 9-14 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 $0.50 coming 3 years from today. The dividend should grow rapidly-at a rate of 15% 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 1896, what is the value of the stock today? Round your answer to the nearest cent. Do not round your intermediate calculations.

Explanation / Answer

D3=0.5

D4=(0.5*1.15)=0.575

D5=(0.575*1.15)=0.66125

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

=(0.66125*1.1)/(0.18-0.1)=$9.0921875

Hence current value=Future dividends*PResent value of discounting factor(18%,time period)

=0.5/1.18^3+0.575/1.18^4+0.66125/1.18^5+9.0921875/1.18^5

=$4.86(Approx)

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