Question

Synovec Co. is growing quickly. Dividends are expected to grow at a rate of 23 percent for the next 3 years, with the growth rate falling off to a constant 4 percent thereafter.

If the required return is 9 percent and the company just paid a $3.10 dividend, what is the current share price?

A. $102.46 B. $106.64 C. $96.90 D. $104.55 E. $100.10

Answer 1

Hello Sir/ Mam

YOUR REQUIRED ANSWER IS OPTION D : $104.55

Given that:

Dividend growth rate = 23% for 3 years and -4% thereafter.

Required Rate of return = 9%

D₀ = $3.1

Calculation of future dividends:

Time	Dividends
0	$3.10
1	$3.81
2	$4.69
3	$5.77
4	$6.00

Hence,

Hence,

Time	Cashflows	PVF	PV
0	$3.10	1	$0.00
1	$3.81	0.917431	$3.50
2	$4.69	0.84168	$3.95
3	$5.77	0.772183	$4.45
3	$119.99	0.772183	$92.65
Total			$104.55

I hope this solves your doubt.

Do give a thumbs up if you find this helpful.

$6.00 9%-4% Ps= = $119.99 Ke-q