Question

Synovec Co. is growing quickly. Dividends are expected to grow at a rate of 24 percent for the next three years, with the growth rate falling off to a constant 6 percent thereafter. If the required return is 14 percent, and the company just paid a dividend of $3.40, what is the current share price?

Answer 1

Answer;

$ 70.07

Explanation:

The price of the stock when the dividends level off at a constant growth rate, we then find the PV of the future stock price, including the PV of all dividends during the super normal growth period. The stock start it constant growth in Year 4, so that we can be able to find the price of the stock in Year 3, which is the year before the constant dividend growth begins as:

P3= D3(1 + g) / (R− g) = D0(1 + g1)3(1 + g2) / (R− g)

P3= $3.40(1.24)3(1.06) / (.14 − .06)

P3= $85.89

Therefore the price of the stock today is the PV of the first three dividends, we then add it with the PV of the Year 3 stock price.

Hence the price of the stock today will be:

P0= $3.40(1.24) / 1.14 + $3.40(1.24)2/ 1.142+ $3.40(1.24)3/ 1.143+ $85.89 / 1.143

P0= $70.07

The current shape price is $70.07