Synovec Co. is growing quickly. Dividends are expected to grow at a rate of 30 percent...

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Synovec Co. is growing quickly. Dividends are expected to grow at a rate of 30 percent...

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?

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Answer 1

Answer #1

D1=(2.45*1.3)=3.185

D2=(3.185*1.3)=4.1405

D3=(4.1405*1.3)=5.38265

Value after year 3=(D3*Growth Rate)/(Required Rate-Growth Rate)

=(5.38265*1.04)/(0.11-0.04)

=$79.9708

Hence current share price=Future dividends*Present value of discounting factor(rate%,time period)

=3.185/1.11+4.1405/1.11^2+5.38265/1.11^3+79.9708/1.11^3

=$68.64(Approx).

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Answer 2

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