Ques. 3 I-Tech computer networks is a fast-growing Communications Company. The c
ID: 2790993 • Letter: Q
Question
Ques. 3 I-Tech computer networks is a fast-growing Communications Company. The company did not pay a dividend last year and is not expected to do so for the next two years. year the company's growth accelerated, and management expects to grow the business at a rate of 35 percent for the next five years before growth slows to a more sta rate of 7 percent for the next several years. In the third year, the company has fo a dividend payment of $1.10. Calculate the value of the company's stock at the rapid growth period (Gi.e, at the end of five years). The required rate of return f stocks is 17 percent. What is the current value of this stock? Last ble growth recasted end of its (5 marks)Explanation / Answer
Dividend at 3rd year end = 1.1
Dividend growth is assumed to be same as business growth
Growth in year 4 & 5 = 35%
Annual Growth after year 5 = 7%
Dividend in year 4 = 1.1*(1+35%) = 1.5
Dividend in year 5 = 1.5*(1+35%) = 2.0
Required return = 17%
Since the growth stables at 7% after year 5 , we can use the dividend discount model to find the value of stock at the end of 5 years
Price of stock at end of 5 years = (Dividend in year 5 * Growth rate in stable years)/(Required Return - Growth rate in stable years)
= 2.0*7%/(17%-7%) = 21.5 (Ansewered)
Present Value (now) of the price of stock at 5 year end = 21.5/(1+17%)^5 = 9.8
Present value of dividend at year 3 = 1.1/(1+17%)^3 = 0.7
Present value of dividend at year 4 = 1.5/(1+17%)^4 =0.8
Present value of dividend at year 5 = 2.0/(1+17%)^5 =0.9
Current Value of stock = Present value of dividends in year 3,4 & 5 + Present value of Price of stock at end of year 5
= 0.7+0.8+0.9+9.8 = 12.2 (Answered)