Question

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 40% per year - during Years 4 and 5; but after Year 5, growth should be a constant 7% per year. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below.

If the required return on Computech is 12%, what is the value of the stock today? Round your answer to the nearest cent. Do not round your intermediate calculations.

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Answer 1

Year	Growth rate	Dividend computation	Dividend	PV factor @12%	Dividend * PV factor
3			$      0.75	0.7118	$           0.53
4	40.00%	0.75*(1+40%)	$      1.05	0.6355	$           0.67
5	40.00%	1.05*(1+40%)	$      1.47	0.5674	$           0.83
5			$   31.46	0.5674	$         17.85
				Current firm value	$         19.89
Current Dividend	$            1.47
Rate of return	12.00%
Growth Rate	7.00%
Share Price at the horizon	=Current Dividend*(1+Growth rate)/(Rate of return-Growth Rate)
Share Price at the horizon	=1.47*(1+0.07)/(0.12-0.07)
Share Price at the horizon	$          31.46