Check My Work (1 remaining) Problem Walk-Through O Problem 9-14 Nonconstant grow
ID: 2786707 • Letter: C
Question
Check My Work (1 remaining) Problem Walk-Through O Problem 9-14 Nonconstant growth paying dividends, beginning with a dividend of $1.25 coming 3 years from today. The dividend should grow rapidly . at a rate of 38% cent. Do not round your intermediate calculations. is expanding rapidly and currently needs to retain all of its earnings; hence, it does not pay dividends. However, investors expect Computech to begin per year-during Years 4 and 5; but 0 after Year 5, growth should be a constant 5% per year. If the required return on Computech is 15% what is the value of the stock today?Round your answer to the nearest Check My Work (a remaining)Explanation / Answer
Computech Corporation is expected to pay a dividend of $1.25 after 3 years thus D3=1.25
Dividend is expected to grow at 38% per year in year 4 and 5 and later at 5% constantly forever. thus g=5%
Required rate of return is 15% ie. r=15%
D3=1.25
hence D4=1.25*(1.38)=1.725 and D5=1.725*(1.38)=2.3805
and terminal value for the stock at year 5, T5 = D5 (1+g) / r-g
=2.3805*(1.05) / 0.15-0.05
=2.4995 / 0.1
=24.995
Value of stock today = D3/(1+r)^3 + D4/(1+r)^4 + D5+T5/(1+r)^5
=1.25/1.15^3 + 1.725/1.15^4 + (2.3805+24.995)/1.15^5
=1.25/1.5209 + 1.725/1.7490 + 27.3755/2.0114
=0.8219 + 0.9863 + 13.6102
=15.4184