Problem:
Microtech Corporation is expanding rapidly, and it currently needs to retain all of its earnings, hence it does not pay any dividends. However, investors expect Microtech to begin paying dividends, with the first dividend of $1.00 coming 3 years from today. The dividend should grow rapidly - at a rate of 40 percent per year - during Years 4 and 5. After Year 5, the company should grow at a constant rate of 8 percent per year.
Required:
Question: If the required return on the stock is 15 percent, what is the value of the stock today?
Note: Please show how you came up with the solution.