Question

Synovec Co. is growing quickly. Dividends are expected to grow at a rate of 21 percent for the next 3 years, then falls to a constant growth rate of 15 percent for another three year, then the growth rate will fall off to a constant 3 percent thereafter.

  
If the required return is 7 percent and the company just paid a $3.00 dividend. what is the current share price?

Answer 1

Year 1 dividend = 3 (1 + 21%) = 3.63

Year 2 dividend = 3.63 (1 + 21%) = 4.3923

Year 3 dividend = 4.3923 (1 + 21%) = 5.31468

Year 4 dividend = 5.31468 (1 + 15%) = 6.11189

Year 5 dividend = 6.11189 (1 + 15%) = 7.02867

Year 6 dividend = 7.02867 (1 + 15%) = 8.08297

Year 7 dividend = 8.08297 (1 + 3%) = 8.32546

Value in year 6 = Year 7 dividend / required rate - growth rate

Value in year 6 = 8.32546 / 0.07 - 0.03

Value in year 6 = 8.32546 / 0.04

Value in year 6 = 208.13644

Current share price = Present value of dividends

Present value = Future value / (1 + rate)^time

Current share price = 3.63 / (1 + 0.07)^1 + 4.3923 / (1 + 0.07)^2 + 5.31468 / (1 + 0.07)^3 + 6.11189 / (1 + 0.07)^4 + 7.02867 / (1 + 0.07)^5 + 8.08297 / (1 + 0.07)^6 + 208.13644 / (1 + 0.07)^6

Current share price = $165.32