Problem:
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 $1.50 coming 3 years from today. The dividend should grow rapidly - at a rate of 18% per year - during Years 4 and 5; but after Year 5, growth should be a constant 5% per year.
Required:
Question: If the required return on Microtech is 16%, what is the value of the stock today?
Note: Show all workings.