Problem 9-14 Nonconstant growth Computech Corporation is expanding rapidly and c
ID: 2786454 • Letter: P
Question
Problem 9-14
Nonconstant growth
Computech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it does not pay dividends. However, investors expect Computech to begin paying dividends, beginning with a dividend of $1.50 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 9% per year. If the required return on Computech is 15%, what is the value of the stock today? Round your answer to the nearest cent. Do not round your intermediate calculations.
$
Explanation / Answer
D3=1.5
D4=(1.5*1.26)=1.89
D5=(1.89*1.26)=2.3814
Value after year 5=(D5*Growth rate)/(Required return-Growth rate)
=(2.3814*1.09)/(0.15-0.09)=$43.2621
Hence current value=Future dividends*Present value of discounting factor(15%,time period)
=1.5/1.15^3+1.89/1.15^4+2.3814/1.15^5+43.2621/1.15^5
=$24.76(Approx).