Question

12. Problem 9.14 (Nonconstant Growth) eBook Problem Walk-Through 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 $1.75 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 4% per year. If the required return on Computech is 16%, what is the value of the stock today? Do not round intermediate calculations. Rou your answer to the nearest cent. Grade It Now Save & Continue Continue without saving

Answer 1

D3=1.75

D4=(1.75*1.48)=2.59

D5=(2.59*1.48)=3.8332

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

=(3.8332*1.04)/(0.16-0.04)

=33.221067(Approx)

Hence current value=Future dividend and value*Present value of discounting factor(rate%,time period)

=1.75/1.16^3+2.59/1.16^4+3.8332/1.16^5+33.221067/1.16^5

=$20.19(Approx).