Question

Problem 6-19 Differential Growth

Synovec Corp. is experiencing rapid growth. Dividends are expected to grow at 30 percent per year during the next three years, 20 percent over the following year, and then 5 percent per year indefinitely. The required return on this stock is 12 percent, and the stock currently sells for $80 per share. What is the projected dividend for the coming year? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Projected dividend           $

Answer 1

Projected dividend $ 3.37

Step-1:Calculation of last paid dividend
As per dividend discount model, current share price is the present value of future dividends.
Present value of 4 years dividend:
Year	Dividend	Discount factor	Present value
a	b	c=1.12^-a	d=b*c
1	$       1.30	0.892857	$       1.16
2	$       1.69	0.797194	$       1.35
3	$       2.20	0.71178	$       1.56
4	$       2.64	0.635518	$       1.68
Total			$       5.75
Present value of dividend of 4 years thereafter	=	D4*(1+g)/(Ke-g)*DF4			Where,
	=	$    25.13			D4	=	$       2.64
					g	=	5%
					Ke	=	12%
					DF4	=	0.635518
Present value of all future dividends	=	$       5.75	+	$    25.13
	=	$    30.88
Last paid dividend	=	$    80.00	/	$    30.88
	=	$       2.59
Step-2:Dividend of next year
Dividend for the coming year	=	$       2.59	*	1.3
	=	$       3.37