Problem 9-14 Nonconstant growth Computech Corporation is expanding rapidly and c
ID: 2787733 • 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 $0.50 coming 3 years from today. The dividend should grow rapidly-at a rate of 15% per year during Years 4 and 5; but after Year 5, growth should be a constant 10% per year. If the required return on Computech is 1896, what is the value of the stock today? Round your answer to the nearest cent. Do not round your intermediate calculations.Explanation / Answer
D3=0.5
D4=(0.5*1.15)=0.575
D5=(0.575*1.15)=0.66125
Value after year 5=(D5*Growth rate)/(Required return-Growth rate)
=(0.66125*1.1)/(0.18-0.1)=$9.0921875
Hence current value=Future dividends*PResent value of discounting factor(18%,time period)
=0.5/1.18^3+0.575/1.18^4+0.66125/1.18^5+9.0921875/1.18^5
=$4.86(Approx)