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 $1.75 coming 3 years from today. the dividend should grow rapidly - at a rate of 43% per year - during years 4 and 5; but after year 5, growth should be a constant 4% per year. if the required return on microtech is 15%, what is the value of the stock today? round your answer to the nearest cent.

Answer 1

To calculate the value of Microtech Corporation stock, we can use the dividend discount model (DDM) with the given growth rates and required return. The value of the stock today is $63.90.

Step-by-step explanation:

To calculate the value of a stock, we can use the dividend discount model (DDM). In this case, Microtech Corporation is expected to start paying dividends in 3 years, with a dividend growth rate of 43% for the next 2 years, and a constant growth rate of 4% thereafter. The required return on Microtech stock is 15%.

First, we need to calculate the present value of the dividends. Using the formula for the present value of a growing perpetuity, we can calculate the present value of the dividends during years 4 and 5. Then, we can calculate the present value of the dividend in year 3.

Finally, we can discount all the present values back to the present using the required return of 15%. The sum of these present values will give us the value of the stock today.

The value of the stock today, rounded to the nearest cent, is $63.90.