Question

Computech Corporation is expanding rapidly and currently needs to 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. The dividend should grow rapidly - at a rate of 22% per year - during Years 4 and 5; but after Year 5, growth should be a constant 6% per year.

Required:
What is the value of the stock today?

Answer 1

$52.75

Step-by-step explanation:

the discount rate for this question was not provided. the discount rate used is 10%

Value of the stock in year 1 and 2 = 0

value of the stock in year 3 = $1.25

value of the stock in year 4 = ($1.25 x 1.22) / 1.10^4 = $1.04

value of the stock in year 5 = ($1.25 x 1.22^2) / 1.10^5 = $1.16

value of the stock in perpetuality = ($1.25 x 1.22^2 x 1.06) / (0.1 - 0.06) = $49.30

Value of the stock today = $49.30 + $1.16 + $1.04 + $1.25 = $52.75