Microtech Corporation is expanding rapidly and currently needs to retain all of
ID: 2804196 • Letter: M
Question
Microtech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it does not pay dividends. However, investors expect Microtech to begin paying dividends, beginning with a dividend of $1.7 coming 3 years om today. The dvidend should gro rapidly at a rate of 43% per year during Years 4 and S but after Year 10% per year the required return on Microtech is 15%, what is the value of the stock today? Round your answer to the nearest cent. S, growth should be a constantExplanation / Answer
D4=(1.75*1.43)=2.5025
D5=(2.5025*1.43)=3.578575
Value after year 5=(D5*Growth rate)/(Required return-Growth rate)
=(3.578575*1.1)/(0.15-0.1)=$78.72865
Hence current value=Future dividends*Present value of discounting factor(15%,time period)
=1.75/1.15^3+2.5025/1.15^4+3.578575/1.15^5+78.72865/1.15^5
which is equal to
=$43.50(Approx).