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 7 percent thereafter. If the required return is 11 percent, and the company just paid a dividend of $2.05, what is the current share price

Answer 1

Answer:

$84.18

Explanation:

The current share price can be determined using the two-stage dividend growth model.

In the two-stage dividend growth model, the first stage is characterised by high growth rate. In the second stage, the high growth rate falls to a steady or normal growth rate

dividend in Y1 = 2.05 x 1.24 = 2.54

dividend in Y2 = 2.05 x 1.24^2 = 3.15

dividend in Y3 = 2.05 x 1.24^3 = 3.91

Y3 = (3.91 X 1.07) / (0.11 - 0.07) = 104.59

Find the present value of these cash flows

(2.54 / 1.11) + (3.15 / 1.11²) + (3.91 / 1.11³) + (104.59/1.11³) = 84.18