Question

Hello! Trying to solve this with a financial calculator!

Synovec Co. is growing quickly. Dividends are expected to grow at a rate of 22 percent for the next 3 years, with the growth rate falling off to a constant 5 percent thereafter. If the required return is 9 percent and the company just paid a $2.20 dividend. what is the current share price?

Multiple Choice

• A $91.06

• B $87.49

• C $86.19

• D $89.28

• E $82.59

Answer 1

Solution

Calculation of current share price

Dividend just paid(D0)= $2.20

Dividend paid in 1 year (D1)= 2.20*(1+0.22) = $2.684

Dividend paid in 2 year (D2) = 2.684*(1+0.22)= $3.27448

Dividend paid in 3 year (D3)= 3.27448*(1+0.22)= $3.9948656

Share price (Pn) = Dn (1+g)/ke-g

Share price (P3) = 3.9948656(1+0.05)/(0.09-0.05)

Share price (P3)= $104.865222

Present value of share = 2.684/(1.09)^1+ 3.27448/(1.09)^2 + 3.9948656/(1.09^3 + 104.865222/(1.09)^3= $89.28

Option D is correct i.e. $89.28

Wl