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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 $0.75 coming 3 years from today. The dividend should grow rapidly - at a rate of 49% 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 18%, what is the value of the stock today? Do not round intermediate calculations. Round your answer to the nearest cent.

Sagot :

ogorwyne

If the required return on Computech is 18% the value of the stock in today's calculation is $11.77

What is the growth rate of a stock?

This is the percentage change of the stock based on the annualized growth rate over a period of time.

D3 = $0.75

D4 = 0.75 x 1.49 = $1.1175

D5 = 1.1175 x 1.49 = $1.665075

D6 = $1.665075 x 1.10 = $1.8315825

At a growth rate of 10 percent

[tex]\frac{D6}{R-G}[/tex]

1.8315825/0.18-0.10

= $[tex]\frac{0.75}{1.18^3} +\frac{1.1175}{1.18^4} +\frac{1.665075}{1.18^5} +\frac{22.89478125}{1.18^5} \\[/tex]

= 0.456473 + 0.576394 + 0.7278196 + 10.0075198

= $11.77

The value of this stock today is  $11.77

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