Synovec Co. is growing quickly. Dividends are expected to grow at a rate of 10.5 percent for the next three years, with the growth rate falling off to a constant 5.4 percent thereafter. If the required return is 10.6 percent and the company just paid a dividend of $5.00, what is the current share price

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amcool amcool · Answer 1 · 2021-04-04T03:17:53+02:00

Answer:

Current share price = $116.04

Explanation:

Note: See the attached file for the calculation of present values (PV) for year 1 to 3 dividends.

From the attached excel file, we have:

Previous year dividend in year 1 = Dividend just paid = $5

Total of dividends from year 1 to year 3 = $14.97289157241870

Year 3 dividend = $6.746163125

Therefore, we have:

Year 4 dividend = Year 3 dividend * (100% + Dividend growth rate in year 4) = $6.746163125 * (100% + 5.4%) = $7.11045593375

Share price at year 3 = Year 4 dividend / (Rate of return - Perpetual dividend growth rate) = $7.11045593375 / (10.6% - 5.4%) = $136.7395371875

PV of share price at year 3 = Price at year 3 / (100% + Required return)^Number of years = $136.7395371875 / (100% + 10.6%)^3 = $101.07150317234

Therefore, we have:

Current share price = Total of dividends from year 1 to year 3 + PV of share price at year 3 = $14.97289157241870 + $101.07150317234 = $116.04