Question

Microtech corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it does not pay dividends. however, investors expect microtech to begin paying dividends, beginning with a dividend of $1.50 coming 3 years from today. the dividend should grow rapidly - at a rate of 26% per year - during years 4 and 5; but after year 5, growth should be a constant 9% per year. if the required return on microtech is 13%, what is the value of the stock today? round your answer to the nearest cent.

Answer 1

The value of Microtech stock is calculated using the Dividend Discount Model which takes into account the present value of future dividends under different growth rates, discounted at the required rate of return.

Step-by-step explanation:

To value Microtech corporation stock, we must calculate the present value of its future dividends using the Dividend Discount Model (DDM). The first dividend will be paid in 3 years and is expected to grow at different rates. We can break the problem down into two parts: calculating the present value of dividends paid during the high-growth phase and the present value of dividends paid during the stable growth phase.

• The dividends for year 3, 4, and 5 will be $1.50, $1.50 × 1.26, and $1.50 × 1.26².
• The present value of these dividends is calculated by discounting them back to today using the required return of

• Starting from year 6, the dividends will grow at a constant rate of 9% indefinitely. We use the Gordon Growth Model to calculate the terminal value at year 5.
• This terminal value is also discounted back to today at the required return of 13%.

Summing the present value of dividends during both phases gives us the value of the stock today.

The value of Microtech stock today is the sum of the present values of all expected future dividends, considering separate growth phases. These present values are calculated using the Dividend Discount Model with the required rate of return as the discount rate.