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 50% per year - during Years 4 and 5, but after Year 5, growth should be a constant 8% 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.
Current stock price is $ 14.92
As per dividend discount model, current stock price is the present value of dividends which is calculated as follows: | ||||||
Step-1:Present Value of non-constant growth stage dividend | ||||||
Year | Dividend | Discount factor | Present Value | |||
a | b | c=1.15^-a | d=b*c | |||
3 | 0.75 | 0.658 | 0.49 | |||
4 | 1.13 | 0.572 | 0.64 | |||
5 | 1.69 | 0.497 | 0.84 | |||
Total | 1.98 | |||||
Working: | ||||||
Dividend of year: | ||||||
3 | = | 0.75 | ||||
4 | = | 0.75 | * | 1.50 | = | 1.13 |
5 | = | 1.125 | 1.50 | = | 1.69 | |
Step-2:Present value of constant growth stage dividend | ||||||
Present Value | = | D5*(1+g)/(Ke-g)*DF5 | ||||
= | 12.94 | |||||
Where, | ||||||
D5 | = | Year 5 dividend | = | 1.69 | ||
g | = | Growth Rate | = | 8% | ||
Ke | = | Required Return | = | 15% | ||
DF5 | = | Discount factor of Year 5 | = | 0.497 | ||
Step-3:Calculation of current price of stock | ||||||
Current Price | = | Present Value of dividends | ||||
= | 1.98 | + | 12.94 | |||
= | 14.92 |
Computech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it...
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