Synovec Co. is growing quickly. Dividends are expected to grow at a rate of 20 p
ID: 2742918 • Letter: S
Question
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 5 percent thereafter. If the required return is 10 percent, and the company just paid a dividend of $2.20, what is the current share price?
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 5 percent thereafter. If the required return is 10 percent, and the company just paid a dividend of $2.20, what is the current share price?
Explanation / Answer
Year Nature of Cashflow Cashflow PV Factor @10% Present Value a b c = a*b Year 1 Dividend $2.64 0.9091 $2.40 Year 2 Dividend $3.17 0.8264 $2.62 Year 3 Dividend $3.80 0.7513 $2.86 Year 3 Market Price at the end of Year 3 $79.83 0.7513 $59.98 Current Market Price $67.85 Dividend Calculation Year 1 = $2.20*1.20 = $2.64 Year 2 = $2.64*1.20 = $3.17 Year 3 = $3.17*1.20 = $3.80 Year 3 = $3.80*1.05 = $3.99 (Growth Rate is 5% after 3 years) Market Price at the end of Year 3 Using Constant Dividend Growth Model Price = Expected Dividend/ (Required Return - Growth Rate) = 3.99 / (0.10-0.05) = 3.99 / 0.05 = 79.83
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