Question

Check My Work 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 33% 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 15%, what is the value of the stock today? Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

A E F - B C D Calculation of current stock price: D1 0 D2 0 D3 1.75 D4 2.33 D5 3.10 D6 3.41 P5 = D6 / (Rate of return - growth rate) = 3.41 / (15% - 10%) = $68.10 Year 1 Cash flows PV factor Present value 0 0.8696 0 0 0.7561 0 1.75 0.6575 1.15 2.33 0.5718 1.33 3.10 0.4972 1.54 68.10265 0.4972 33.86 Current stock price 37.88 Current stock price = $37.88

EXCEL FORMULA:

А Calculation of current stock price: D1 По D2 D3 D4 D5 DO lo 1.75 =C4*(1+33%) =C5*(1+33%) =C6*(1+10%) P5 = D6 / (Rate of return - growth rate) = 3.41 / (15% - 10%) = $68.10 Year Cash flows PV factor jo =1/(1+15%)^B14 lo =1/(1+15%)^B15 1.75 =1/(1+15%)^B16 =1/(1+15%)^B17 =C6 =1/(1+15%)^B18 68.10265 =1/(1+15%)^B19 Current stock price Present value =C14*D14 =C15*D15 =C16*D16 =C17*D17 =C18*D18 =C19*D19 =SUM(E14:E19) =C5 Current stock price = $37.88