Microtech Corporation is expanding rapidly and currently needs to retain all of
ID: 1177232 • Letter: M
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 35% per year - during Years 4 and 5; but after Year 5, growth should be a constant 10% per year. If the required return on Microtech is 17%, what is the value of the stock today? Round your answer to the nearest cent.
Explanation / Answer
Microtech Corporation is expanding rapidly, and it currently needs to retain all of its earnings, hence it does not pay any dividends. However, investors expect Mircotech to begin paying dividends, with the first dividend of $1.00 coming 3 years from today. The dividend should grow rapidly at a rate of 50% per year per year during Years 4 and 5. After year 5, the company should grow at a constant rate of 8 percent a year. If the required return on the stock is 15%, what is the value of the stock today?