Question

Synovec Corporation is expected to pay the following dividends over the next four years: $6.20, $17.20, $22.20, and $4.00. Afterward, the company pledges to maintain a constant 5.5 percent growth rate in dividends forever. If the required return on the stock is 9 percent, what is the current share price

Answer 1

Current price =$125.56

Step-by-step explanation:

According to the dividend valuation model, the value of a share is the present value(PV) of its future expected dividend discounted at the required rate of return.

We will sum the PV of its future dividends as follows:

PV in year 1 = 6.20 × 1.09^(-1)= 5.69

PV in year 2 = 17.20 × 1.09^(-2)= 14.48

PV in year 3 = 22.20 × 1,09^(-3)=17.14

PV in year 4 = 4 × 1.09^(-4)= 2.83

PV in year 5 and beyond = (4 × 1.055)/(0.09-0.055) ×1.09^(-4) = 85.42

Current price = 5.69 + 14.48 + 17.14 + 2.83 + 85.42 = 125.56

Current price =$125.56