Question

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?

Answer 1

	Required rate=	11.00%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	2.45	30.00%	3.185		3.185	1.11	2.8694
2	3.185	30.00%	4.1405		4.1405	1.2321	3.36052
3	4.1405	30.00%	5.38265	79.971	85.35365	1.367631	62.40985
	Long term growth rate (given)=	4.00%			Value of Stock =	Sum of discounted value =	68.64

Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 3 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor