S08-18 Supernormal Growth (LO1]
Synovec Co. is growing quickly. Dividends are expected to grow at a rate of 30 percent for the next three years, with the growth rate falling off to a constant 4 percent thereafter. If the required return is 11 percent, and the company just paid a dividend of $2.45, what is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Current share price = _______
current price =$68.64.
PV factor = 1 /(1+r)^n
n= 1,2,3
r=11%=>0.11
| year | cash flow | PV factor | cash flow * PV factor |
| 1 | ($2.45*1.30)=>$3.185 dividend | 1 / (1.11)^1=>0.90090 | 2.8693665 |
| 2 | 3.185*1.30=>4.1405 | 1/(1.11)^2=>0.81162 | 3.36051261 |
| 3 | 4.1405*1.30=>5.38265 | 1/(1.11)^3=>0.73119 | 3.9357398535 |
| 3 | (see note)79.9708 | 1/(1.11)^3=>0.73119 | 58.473849252 |
| current price | 68.64 |
price at the end of year 3 = D3*(1+growth rate) / (required rate - growth rate)
=>5.38265 * (1.04) / (0.11-0.04)
=>79.9708
Synovec Co. is growing quickly. Dividends are expected to grow at a rate of 30 percent for the next three years, with the growth rate falling off to a constant 4 percent thereafter
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