Microtech Corporation is expanding rapidly and currently needs to retain all of

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 $2.00 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

PV@14%

Terminal value = 3.92 (1+.06)/(.14-.06

                        = 3.92 * 1.06 / .08

                       = 51.94

year D

PV@14%

D *PV 1 0 .87719 0 2 0 .76947 0 3 2 .67497 1.3499 4 2.8     [2(1+.40)] .59208 1.6578 5 3.92    [2.8(1+.4)] .51937 2.0359 Terminal value at year5 51.94 .51937 26.9761 Current price 32.02

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