NONCONSTANT GROWTH Computech Co poration is expanding rapidl

NONCONSTANT GROWTH Computech Co poration is expanding rapidly and currently needs to eta n all of its earnings; hence, it does not pay dividends. However, investors expect Computech to begin paying dividends beginning with? dividend of $1.00 coming 3 years trom today. The dividend should grow rapidly at a rate of 44% per year during Years 4 and 5; but after Year 5 growth should be a constant 4% per year. If the required return on Computech is 15%, what is the value or the stock today? Round your answer to the nearest cent. Do not round your intermediate calculations.

Solution

D3=$1

D4=(1*1.44)=$1.44

D5=(1.44*1.44)=$2.0736

Value after year 5=(D5*Growth rate)/(Required return-Growth rate)

=(2.0736*1.04)/(0.15-0.04)=$19.60494545(Approx)

Hence value of stock today=Future dividends*Present value of discounting factor(15%,time period)

=$1/1.15^3+$1.44/1.15^4+$2.0736/1.15^5+$19.60494545/1.15^5

which is equal to

=$12.26(Approx).