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 8 percent thereafter. If the required return is 11 percent, and the company just paid a dividend of $1.45, what is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e. g., 32.16.)

Question

Kinley Anderson

Business

4 June, 07:16

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 8 percent thereafter. If the required return is 11 percent, and the company just paid a dividend of $1.45, what is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e. g., 32.16.)

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Answers (1)

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Nash Stevenson · Answer 1

The current share price is $71.05

Explanation:

P3 = D3 (1 + g) / (R - g)

= D0[ (1 + g1) ^3] (1 + g2) / (R - g)

= [$1.45 * (1.20) ^3 (1.08) ] / (0.11 - 0.08)

= $90.20

The price of the stock today is the PV of the first three dividends, plus the PV of the Year 3 stock price given by:

P0 = $1.45 (1.20) / 1.11 + $1.45[ (1.20) ^2]/1.112 + $1.45[ (1.20) ^3]/1.113 + $90.20/1.113

= 1.568 + 1.695 + 1.832 + 65.958

= $71.05

Therefore, The current share price is $71.05