Synovec Co. is growing quickly. Dividends are expected to grow at a rate of 20 p

Question

Synovec Co. is growing quickly. Dividends are expected to grow at a rate of 20 percent for the next three years, with the growth rate falling off to a constant 5 percent thereafter. If the required return is 11 percent, and the company just paid a dividend of $3.10, what is the current share price?

Synovec Co. is growing quickly. Dividends are expected to grow at a rate of 20 percent for the next three years, with the growth rate falling off to a constant 5 percent thereafter. If the required return is 11 percent, and the company just paid a dividend of $3.10, what is the current share price?

Explanation / Answer

Last Year Dividend (D0) = $ 3.1

1st Year Dividend (D1) = $ 3.72 ( 3.1 * 1.2 )

2nd Year Dividend (D2) = $ 4.46 ( 3.72 * 1.2 )

3rd Year Dividend (D3) = $ 5.36 ( 4.46 * 1.2 )

4th Year Dividend (D4) = $ 5.62 ( 5.36 * 1.05 )

Price of Stock at end of Year 3 = D4 / (Ke - g)

= 5.62 / ( 0.11 - 0.05 )

= $ 93.74

Price of stock now = 3.72 / 1.11 + 4.46 / (1.11)2 + (5.36 + 93.74) / (1.11)3 = $ 79.44

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