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 $0.75 coming 3 years from today. The dividend should grow rapidly - at a rate of 48% per year - during Years 4 and 5; but after Year 5, growth should be a constant 6% per year. If the required return on Computech is 13%, what is the value of the stock today? Round your answer to the nearest cent. Do not round your intermediate calculations. $
D3=0.75
D4=(0.75*1.48)=1.11
D5=(1.11*1.48)=1.6428
Value after year 5=(D5*Growth rate)/(Required rate-Growth rate)
=(1.6428*1.06)/(0.13-0.06)
=24.8766857
Hence current value=Future dividend and value*Present value of discounting factor(rate%,time period)
=0.75/1.13^3+1.11/1.13^4+1.6428/1.13^5+24.8766857/1.13^5
=$15.59(Approx).
Nonconstant growth Computech Corporation is expanding rapidly and currently needs to retain all of its earnings;...
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 $1.25 coming 3 years from today. The dividend should grow rapidly-at a rate of 35% per year-during Years 4 and 5; but after Year 5, growth should be a constant 9% per year. If the required return on Computech is 15%, what is the value...
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