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 $1.00 coming 3 years from today. The dividend should grow rapidly - at a rate of 36% 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 18%, what is the value of the stock today? Round your answer to the nearest cent. Do not round your intermediate calculations.
Year 3 dividend = 1
Year 4 dividend = 1 (1 + 36%) = 1.36
Year 5 dividend = 1.36 (1 + 36%) = 1.8496
Year 6 dividend = 1.8496 (1 + 6%) = 1.960576
Value at year 5 = D6 / required rate - growth rate
Value at year 5 = 1.960576 / 0.18 - 0.06
Value at year 5 = 1.960576 / 0.12
Value at year 5 = 16.338133
Value fo stock = 1 / (1 + 0.18)^3 + 1.36 / (1 + 0.18)^4 + 1.8496 / (1 + 0.18)^5 + 16.338133 / (1 + 0.18)^5
Value fo stock = 0.608631 + 0.701473 + 0.808477 + 7.141549
Value fo stock = $9.26
Computech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it...
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 $1.00 coming 3 years from today. The dividend should grow rapidly - at a rate of 19% per year - during Years 4 and 5, but after Year 5, growth should be a constant 5% per year. If the required return on Computech is 15%, what is...
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