Microtech Corporation is expanding rapidly and currently needs to retain all of
ID: 2696104 • 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 $0.75 coming 3 years from today. The dividend should grow rapidly - at a rate of 27% 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 18%, what is the value of the stock today? Round your answer to the nearest cent.
Explanation / Answer
PV = (.75/1.18^3)+(.75*1.27/1.18^4)+((.75*1.27^2)/1.18^5)+((.75*(1.27^2)*1.06/(.18-.06))/(1.18^5))
PV = $6.15