Question

Synovec Corp., which just paid $1.0 dividends per share, is experiencing rapid growth. Dividends are expected to grow at 30 percent per year during the next three years, 18 percent over the following year, and then 8 percent per year indefinitely. The appropriate discount rate is 14%, and the stock currently sells for $32 per share. Calculate the intrinsic value of this stock.

Answer 1

$54.44

Step-by-step explanation:

This is the stock of the company that is expected to have multiple growth stages.

In the first phase, company is expted to grow 30% per year, so dividend paid from Year 1 to Year 3 are D_1 = 1.0 x (1 + 30%); D_2 = 1.0 x (1 + 30%)^2 and D_3 = 1.0 x (1 + 30%)^3 respectively.

Dividend in Year 4 is D_4 = D_3 x (1 + 18%).

Dividend in Year 5 is D_5 = D_4 x (1 + 8%).

Terminal value in at Year 4 is T_4 = D_5/(Discount rate - Long-tern growth)

Value of this stock is discounted relevant cashflow from Year 1 to Year 4 (include terminal value).

Putting all the number together, we have intrinsic value of the stock = $54.44