Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. finance
  3. computech corporation is expanding rapidly and cur

Computech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it...

Free

50.1K

Verified Solution

Question

Finance

Computech Corporation is expanding rapidly and currently needsto retain all of its earnings; hence, it does not pay dividends.However, investors expect Computech to begin paying dividends,beginning with a dividend of $1.25 coming 3 years from today. Thedividend should grow rapidly-at a rate of 19% per year-during Years4 and 5; but after Year 5, growth should be a constant 6% per year.If the required return on Computech is 12%, what is the value ofthe stock today? Round your answer to the nearest cent. Do notround your intermediate calculations.

Answer & Explanation Solved by verified expert
4.0 Ratings (716 Votes)

Required rate= 12.00%
Year Previous year dividend Dividend growth rate Dividend current year Horizon value Total Value Discount factor Discounted value
1 0 0.00% 0 0 1.12 0
2 0 0.00% 0 0 1.2544 0
3 0 0.00% 1.25 1.25 1.404928 0.88973
4 1.25 19.00% 1.4875 1.4875 1.57351936 0.94533
5 1.4875 19.00% 1.770125 31.272 33.042125 1.762341683 18.74899
Long term growth rate (given)= 6.00% Value of Stock = Sum of discounted value = 20.58
Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year
Unless dividend for the year provided
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 5 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
Become a Member

Transcribed Image Text

Computech Corporation is expanding rapidly and currently needsto retain all of its earnings; hence, it does not pay dividends.However, investors expect Computech to begin paying dividends,beginning with a dividend of $1.25 coming 3 years from today. Thedividend should grow rapidly-at a rate of 19% per year-during Years4 and 5; but after Year 5, growth should be a constant 6% per year.If the required return on Computech is 12%, what is the value ofthe stock today? Round your answer to the nearest cent. Do notround your intermediate calculations.

Other questions asked by students

Q

(b) State three advantages of digital technology compared with analog technology?

Electrical Engineering
Q

15.3     What does the Wagner Act prohibit?

Mechanical Engineering
Q

A projectile is fired from the ground, reaches a maximum height of 26.8 m and lands...

Physics
Q

Identify the point of view in the following quotation from "The Necklace" by Guy de...

Biology
Q

K Find the exact value of the expression tan arcsin lon 19 6 1 75...

Geometry
Q

The time it takes a person to wash the dishes is uniformly distributed between 5...

Statistics
Q

Multiply and simplify the result 7x x 2 x 2 4 28x 3 42x x...

Algebra
Q

6 4 5x 16 8 1 5a 2 29

Algebra
Q

ABC Company has $10,000 in underapplied overhead. When this amount is transferred to cost of...

Accounting
Q

Cash collection budget is usually prepared after the production budget True False

Accounting
Q

a. During the year 201, Sampson Company had net credit sales of $1,050,000. Past experience...

Accounting
Q

Part 1 will contain a chart of accounts with opening account balances, list of business...

Accounting