Microtech Corporation is expanding rapidly and currently needs to retain all of
ID: 2721010 • 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 26% 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 15%, what is the value of the stock today? Round your answer to the nearest cent.
Explanation / Answer
Answer
Figures in $
Particulars
Amount
Dividend at end of year 6
a
1.285956
(1.1907*1.08)
Cost of capital - growth rate
b
0.07
(0.15-0.08)
Price end the end of year 5 (a/b)
18.3708*
Figures in $
Year
Dividend
Market value
Cash flow
Disc rate : 15%
Present value
A
B
C
D
A+B
C*D
1
0
0.87
0
2
0
0.76
0
3
0.75
0.7500
0.66
0.49
4
0.75*1.26
0.945
0.9450
0.57
0.54
5
0.945*1.26
1.1907
18.3708*
19.5615
0.50
9.73
Current market price
10.76
Answer : The value of the stock today is $ 10.76
Figures in $
Particulars
Amount
Dividend at end of year 6
a
1.285956
(1.1907*1.08)
Cost of capital - growth rate
b
0.07
(0.15-0.08)
Price end the end of year 5 (a/b)
18.3708*