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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 $1.00 coming 3 years from today. Thedividend should grow rapidly - at a rate of 47% per year - duringYears 4 and 5, but after Year 5, growth should be a constant 8% peryear. If the required return on Computech is 12%, what is the valueof the stock today? Do not round intermediate calculations. Roundyour answer to the nearest cent. $

Answer & Explanation Solved by verified expert
4.1 Ratings (564 Votes)

As per dividend discount model, value of stock today is the present value of dividends.
Step-1:Present value of dividend upto year 5
Year Dividend Discount factor Present value
a b c=1.12^-a d=b*c
3 $       1.00 0.71178 $       0.71
4 $       1.47 0.635518 $       0.93
5 $       2.16 0.567427 $       1.23
Total $       2.87
Working:
Dividend of year:
4 $       1.00 x 1.47 = $       1.47
5 $       1.47 x 1.47 = $       2.16
step-2:Present value of dividend after year 5
Present value = D5*(1+g)/(Ke-g)*DF5 Where,
= $    33.11 D5 Dividend of year 5 $       2.16
g Growth rate 8%
Ke Required return 12%
DF5 Discount factor of year 5 0.567427
Step-3:Present value of all dividends
Present value of all dividends = $       2.87 + $    33.11
= $    35.98
So, value of stock today is $ 35.98

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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 $1.00 coming 3 years from today. Thedividend should grow rapidly - at a rate of 47% per year - duringYears 4 and 5, but after Year 5, growth should be a constant 8% peryear. If the required return on Computech is 12%, what is the valueof the stock today? Do not round intermediate calculations. Roundyour answer to the nearest cent. $

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