Question

Synovec Corp. is experiencing rapid growth. Dividends are expected to grow at 26 percent per year during the next three years, 16 percent over the following year, and then 4 percent per year, indefinitely. The required return on this stock is 10 percent and the stock currently sells for $64 per share. What is the projected dividend for the coming year?

Answer 1

Terminal value at year 4 = D0(1.26)^3(1.16)(1.04) /(.10-.04)

=D0(1.26)^3(1.16)(1.04)/ .06

Present value of dividend @10% = current price(64)

[D0*1.26 * .90909) ] + [D0(1.26)^2*.82645] +[D0(1.26)^3*.75131] +[D0(1.26)^3(1.16).68301] +[D0(1.26)^3(1.16)(1.04)*.68301 /.06]

[D0 * 1.145 ] +[D0* 1.312 ]+[D0*1.503 ]+[D0*1.585]+[D0 *27.471] =     64

33.016 * D0 =64

D0 = 64/33.016 = $1.938

Dividend for next year = 1.938* (1+0.26) = $2.442 per share