Question

Synovec Co. is growing quickly. Dividends are expected to grow at a rate of 24 percent for the next 3 years, with the growth rate falling off to a constant 7 percent thereafter.

  

If the required return is 12 percent and the company just paid a $1.50 dividend. what is the current share price?

Multiple Choice

• $48.12

• $50.08

• $44.43

• $47.06

• $49.10

Answer 1

Stock Price :
The price is a reflection of the company's value – what the public is willing to pay for a piece of the company. It is nothing but present value of cash flows ( Div & Sale Price of Stock at future date) from it.

Div calculation:

Year	Cash Flow / Div	Formula	Calculation
1	$                     1.86	D0 ( 1 + g)	1.5 ( 1 + 0.24 )
2	$                     2.31	D1 ( 1 + g)	1.86 * ( 1 + 0.24 )
3	$                     2.86	D2 ( 1 + g)	2.31 * ( 1 + 0.24 )
4	$                     3.06	D3 ( 1 + g)	2.86 * ( 1 + 0.07 )

Price after 3 Years:

Price of Stock is nothing but PV of CFs from it.
P3 = D4 / [ Ke - g ]
= $ 3.06 / [ 12 % - 7 % ]
= $ 3.06 / [ 5 % ]
= $ 61.2
P3 - Price after 3 years

D4 - Div after 4 Years

Ke - Required Ret

g- Growth Rate

Price Today:

Year	Particulars	Cash Flow	PVF @12 %	Disc CF
1	D1	$      1.86	0.8929	$              1.66
2	D2	$      2.31	0.7972	$              1.84
3	D3	$      2.86	0.7118	$              2.04
3	P3	$   61.20	0.7118	$           43.56
Price				$           49.10

Price of stock Today is $ 49.10