Ques. 3 I-Tech computer networks is a fast-growing Communications Company. The c
ID: 2790994 • 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
The growth rate given is 35% for 5 years and later at 7% perpetually.
Required return = 17%
And dividend declared in 3rd year is 1.10
Thus:
Year 3 = 1.10
Year 4 = 1.10*(1.35) = 1.485
Year 5 = 1.10*(1.35)^2 = 2.00475
After year 5 terminal year = 2.00475*(1.07) / 0.17-0.07 = 2.1451 / 0.1 = 21.4508
The value of stock at year 5 = D5*(1+g) / r-g
=21.4508+2.00475 = 23.4556
Current Value of stock = Dn / (1+r)^n
= D3 / (1+r)^3 + D4 / (1+r)^4 + D5 / (1+r)^5
= 1.10 / (1.17)^3 + 1.485 / (1.17)^4 + 23.4556 / (1.17)^5
= 1.10 / 1.6016 + 1.485 / 1.8739 + 23.4556 / 2.1924
= 0.6868 + 0.7925 + 10.6986
= 12.1779