Question

# Synovec Corp. is experiencing rapid growth. Dividends are expected to grow at 24 percent per year...

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.)

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

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