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 29% per year - during Years 4 and 5; but after Year 5, growth should be a constant 9% per year. The data has been collected in the Microsoft Excel Online file below. Fill in the fields.

A В C D Nonconstant growth 1 2 Year 3 Dividend, D $0.75 3 Supernormal growth rate, g 29.00% 4 Normal growth rate, gn Required return, r 5 9.00% 17.00% 9.00% 29.00% 29.00% 7 0 1 2 3 4 5 6 $0.75 Dividends 0 0 10 P5 11 Cash flows to common stockholders 0 0 12 PV of cash flows to common stockholders 13 Stock Price, Po 14 15 Alternatively, using Excel NPV function: Stock Price, P 16

If the required return on Computech is 17%, what is the value of the stock today? Round your answer to the nearest cent. Do not round your intermediate calculations.

$ ______

Answer 1

=0.75/1.17^3+0.75/1.17^3*1.29/1.17+0.75/1.17^3*1.29/1.17*1.29/1.17+0.75/1.17^3*1.29/1.17*1.29/1.17*1.09/(17%-9%)
=9.31003