Question

Problem 9-14 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 $2.00 coming 3 years from today. The dividend should grow rapidly - at a rate of 29% 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 13%, what is the value of the stock today? Round your answer to the nearest cent. Do not round your intermediate calculations.

Answer 1

D3=2

D4=(2*1.29)=2.58

D5=(2.58*1.29)=3.3282

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

=(3.3282*1.1)/(0.13-0.1)

=122.034

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

=2/1.13^3+2.58/1.13^4+3.3282/1.13^5+122.034/1.13^5

=$71.01(Approx).