Question

Synovec Corp. is experiencing rapid growth. Dividends are expected to grow at 24 percent per year during the next three years, 14 percent over the following year, and then 8 percent per year, indefinitely. The required return on this stock is 10 percent and the stock currently sells for $86 per share. What is the projected dividend for the coming year? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Let x be the dividend paid next year. So, dividend paid for year 2 and 3 will be 1.24x and 1.24^2*x. for Year 4 will be 1.24^2*1.14*x and 1.24^2*1.14*1.08 in Year 5.

Using Dividend Discount Model (DDM), Price of this stock can be calculated using the formula: D1/(1+r)+D2/(1+r)^2+D3/(1+r)^3+D4/(1+r)^4+(D5/(r-g))/(1+r)^4; where D1 to D5 are dividends paid from Year 1 to Year 5, r is required rate of return and g is constant growth rate of dividend.

So, Price of the stock= 86= x/1.1+(1.24x)/1.1^2+(1.24^2*x)/1.1^3+(1.24^2*1.14*x)/1.1^4+((1.24^2*1.14*1.08*x)/(10%-8%))/1.1^4

86= 68.9367*x

x= $1.25

So, Projected dividend for coming year is $1.25