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

Answer 1

`D_(0)` = $3.10,
`D_(1) - D_(3)`= 20%,
`D_(4)` += 5%, R = 11%

`D_(1)` = $3.10 • (1 + .20) = $3.10 • 1.20 = $3.720

`D_(2)` = $3.10 •
`(1 + .20)^(2)` = $3.10 • 1.44 = $4.464

`D_(3)` = $3.10 •
`(1 + .20)^(3)`= $3.10 • 1.728 = $5.357

`D_(4)` = $5.357 • (1 + 05) = $5.624

`P_(3)` =
`D_(4)` / (R – g)= $5.624 / 0.06= $93.744

`P_(0)` =
`D_(1) + D_(2) + D_(3) + P_(3)` =(1 + R)
`(1 + R) ^(2) (1 + R)^(3)`

= $3.720 + $4.464 + $5.357 + $93.744

= (1 + .11) (1 + .11)2(1 + .11)3= $3.720 + $4.464 + $99.101

=(1.11) (1.11)2(1.11)3= $3.720 + $4.464 + $99.101

=1.11 1.232 1.368= $3.351 + $3.623 + $72.462 = $79.44