Microtech Corporation is expanding rapidly and currently needs to retain all of
ID: 2652097 • 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 $0.50 coming 3 years from today. The dividend should grow rapidly - at a rate of 29% per year - during Years 4 and 5; but after Year 5, growth should be a constant 6% 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.
$
Explanation / Answer
Dividend Distribution :
Working Note : First three Years dividends would be $ 0.50
Fourth Year Calculation = 0.5*(1+29%) = 0.65
Fifth Year Calculation = 0.65*(1+29%) = 0.83
Year 6 = 6.72
Now we will formulate their present value @ 13% (Dividend/(1+required rate of return)^n
Hence, the present Value of Stock = $ 5.68