Microtech Corporation is expanding rapidly and currently needs to retain all of
ID: 2669918 • 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 $1.00 coming 3 years from today. The dividend should grow rapidly - at a rate of 24% per year - during Years 4 and 5; but after Year 5, growth should be a constant 8% per year. If the required return on Microtech is 18%, what is the value of the stock today? Round your answer to the nearest cent.Explanation / Answer
Hi, Please find the answer as follows: D3 = 1.50 D4 =1.50 (1.24) = 1.86 D5 = 1.86 (1.24) = 2.31 D6 = 2.31 (1.09) = 2.52 P5 = D6/(k-g) = 2.52/(0.14 - 0.09) = 50.4 Present value of cash flows: C02 = 1.50 C03 = 1.86 C04 = 2.31 + 50.4 = 52.81 NPV = 1.5/(1+0.14)^3 + 1.86/(1+0.14)^4 + 52.81/(1+0.14)^5 = 29.54 Thanks, Aman