Question

Synovec Co. is growing quickly. Dividends are expected to grow at a rate of 25 percent for the next 3 years, with the growth rate falling off to a constant 6 percent thereafter. If the required return is 12 percent and the company just paid a $1.30 dividend. what is the current share price

Answer 1

$36.81

Step-by-step explanation:

Div₀ = $1.30

Div₁ = $1.625

Div₂ = $2.03125

Div₃ = $2.5390625

Div₄ = $2.6914 at a constant g of 6%

first we need to determine the terminal value in year 3:

P = $2.6914 / (12% - 6%) = $44.86

the current stock price, P₀ = $1.625/1.12 + $2.03125/1.12² + $2.5390625/1.12³ + $44.86/1.12³ = $1.45 + $1.62 + $1.81 + $31.93 = $36.81