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

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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.

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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

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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.

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