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 5 percent thereafter.

If the required return is 9 percent and the company just paid a $3.60 dividend. what is the current share price?

Answer 1

Step-1, Dividend per share for the next 3 years

Dividend in Year 0 (D0) = $3.60 per share

Dividend in Year 1 (D1) = $4.4280 per share [$3.60 x 123%]

Dividend in Year 2 (D2) = $5.4464 per share [$4.4280 x 123%]

Dividend in Year 3 (D3) = $6.6991 per share [$5.4464 x 123%]

Step-2, Calculation of Stock Price for the Year 3(P3)

Dividend Growth Rate after 3^rd year (g) = 5.00%

Required Rate of Return (Ke) = 9.00%

Stock Price for the Year 3 = D3(1 + g) / (Ke – g)

= $6.6991(1 + 0.05) / (0.09 – 0.05)

= $7.0341 / 0.04

= $175.85 per share

Step-3, The Current share price

The Current Stock Price is the aggregate of the Present Value of the future dividend payments and the present value the stock price for the year 4

Year	Cash flow ($)	Present Value factor at 9.00%	Present Value of cash flows ($)
1	4.4280	0.91743	4.06
2	5.4464	0.84168	4.58
3	6.6991	0.77218	5.17
3	175.85	0.77218	135.79
TOTAL			149.61

“Hence, the Current Share Price will be $149.61”

NOTE

The Formula for calculating the Present Value Factor is [1/(1 + r)ⁿ], Where “r” is the Discount/Interest Rate and “n” is the number of years.