Question

# synovec corp is experiencing rapid growth. dividends are expected to grow at 25 percent per year...

synovec corp is experiencing rapid growth. dividends are expected to grow at 25 percent per year during the next three years, 17 percent over the following year and then 5 percent per year, indefinitely. the required return on this stock is 11 percent and the stock currently sells for 65\$ per share. what is the projected dividend for the coming year?

Let the Dividends paid this year be D0

=> D1 = 1.25*D0
D2 = 1.252*D0
D3 = 1.253*D0
D4 = 1.253*1.17*D0
D5 = 1.253*1.17*1.05*D0

Rate of interest = r = 11%

Growth rate indefenitely = g = 5%

According to Gordon Growth model,

P4 = D5/(r-g)

=> P4 = 1.253*1.17*1.05*D0/(0.11 - 0.05)

PV of the stock = D1/(1+r) + D2/(1+r)2 + D3/(1+r)3 + D4/(1+r)4 + P4/(1+r)4 = 65

=> 1.25*D0/1.11 + 1.252*D0/(1.11)2 + 1.253*D0/(1.11)3 + 1.253*1.17*D0/(1.11)4 + (1.253*1.17*1.05*D0/(0.11 - 0.05))/(1.11)4 = 65

=> 31.67D0 = 65 => D0 = \$2.05

Hence, dividend in next period = D1 = 2.05*1.25 = \$2.56