   Chapter 9, Problem 14P Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

Solutions

Chapter
Section Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

NONCONSTANT GROWTH 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 $1.00 coming 3 years from today. The dividend should grow rapidly—at a rate of 50% per year—during Years 4 and 5; but after Year 5, growth should be a constant 8% per year. If the required return on Microtech is 15%. what is the value of the stock today? Summary Introduction To determine: The value of the stock today. Horizon Value It is the present value of all cash inflows and outflows likely to occur at future date with g constant growth rate after that date. The time period up to which the company has non-constant growth rate is known as horizon date. Explanation Given, Dividend paid is$1.

Non-constant growth rate is 50%.

Return on stock is 15%

Constant growth rate is 8%.

The price of the stock will be:

P0=D3(1+rs)3+D4(1+rs)4+D5(1+rs)5+DN(1+gn)rsgn(1+rs)=D3(1+rs)3+D3(1+gs)(1+rs)4+D3(1+gs)2(1+rs)4+D3(1+gs)2(1+gn)rsgn(1+rs)4

Substitute values \$1 for, 0

Still sussing out bartleby?

Check out a sample textbook solution.

See a sample solution

The Solution to Your Study Problems

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

Get Started 