Microtech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it does not pay dividends.

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 $1.25 coming 3 years from today. The dividend should grow rapidly – at a rate of 25% per year – during Years 4 and 5; but after Year 5, growth should be a constant 6% per year. If the required return on Microtech is 17%, what is the value of the stock today? Round your answer to the nearest cent.

 

 

answer:

growth
D3           1.25 Required Return 17%
D4           1.56 25%
D5           1.95 25%
D6           2.07 6%
P5 = D6/Ke-g
P5 = 2.07/(0.17-0.06)
        18.82
P0 = D3/(1+r)^3 + D4/(1+r)^4 + D5/(1+r)^5 + P5/(1+r)^5
P0 = 1.25/(1.17)^3 + 1.56/(1.17)^4 + 1.95/(1.17)^5 + 18.82/(1.17)^5
$    11.09
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