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Microtech Corporation: The Value of Stock

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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 coming in 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 constant at 8% per year. If the required return on Microtech is 15%, what is the value of its stock today?

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Solution Summary

This solution is comprised of a detailed explanation which outlines and solves how to calculate the value of the current stock for the Microtech Corporation. This solution is about 200 words and describes the variables and equation required to solve for this problem.

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D3 = 1.00
D4 = 1.00(1.50) = 1.50
D5 = 1.50(1.50) = 2.25
D6 = 2.25(1.08) = 2.43

Then, you can find the price of the stock at the end of year 5 as follows:
P = D6/(k - ...

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