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40 votes
Synovec Co. is growing quickly. Dividends are expected to grow at a rate of 22 percent for the next three years, with the growth rate falling off to a constant 5 percent thereafter. If the required return is 12 percent, and the company just paid a dividend of $2.35, what is the current share price

User Azu
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2 Answers

23 votes
23 votes

Final answer:

The current share price of Synovec Co. is calculated by finding the present value of expected future dividends which are growing at different rates over time, using the required return rate and applying the Dividend Discount Model.

Step-by-step explanation:

The calculation for the current share price of Synovec Co. involves determining the present value of the future dividends. Since the dividends are expected to grow at different rates over different periods, we must perform separate calculations for each stage. Initially, they grow at 22% for the next three years, and then at a constant rate of 5% afterward.

First, calculate the future dividend amounts for the first three years. Then, discount those future dividends back to their present value using the required return rate of 12%. The formula for the present value of growing dividends is PDV = D/(r-g), where D is the dividend, r is the required return rate, and g is the growth rate.

After determining the present value of the dividends during the high-growth period, we then calculate the present value of all subsequent dividends, assuming perpetual growth at 5%. This is referred to as the Gordon Growth Model or the Dividend Discount Model for stocks with perpetual growth. Finally, sum up the present values of all dividends to find the current share price of Synovec Co.

It's important to note that in a real-world scenario, these projections are estimates and carry a degree of uncertainty, and the choice of the discount rate (required return) can significantly alter the valuation of the shares.

User MaxPY
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2.8k points
13 votes
13 votes

Answer:

53.98

Step-by-step explanation:

current share price is the present value of dividends

Year 1 = 2.35 x 1.22 = 2.867

Year 2 = 2.867 x 1.22 = 3.50

Year 3 = 3.50 x 1.22 = 4.27

+ 4.27 x 1.05 / (0.12 - 0.05) = 64

I - 12%

PV = 53.98

To find the PV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute

User Pramod Garg
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2.7k points