Microtech Corporation is expanding rapidly and currently needs to retain all of
ID: 2697847 • 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 $1.75 coming 3 years from today. The dividend should grow rapidly - at a rate of 40% 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 14%,
what is the value of the stock today? Round your answer to the nearest cent.
Explanation / Answer
value of the stock today= 1.75/1.14^3 + 2.45/1.14^4 + 3.43/1.14^5 + {3.6358/(0.14-0.06)}/1.14^5 Â = $28.02