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Synovec Co. is growing quickly. Dividends are expected to grow at a rate of 4.31 percent...

Synovec Co. is growing quickly. Dividends are expected to grow at a rate of 4.31 percent for the next three years, with the growth rate falling off to a constant 6.96 percent thereafter. If the required return is 9.95 percent and the company just paid a dividend of $7.19, what is the current share price?

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Expert Solution

Required rate= 9.95%
Year Previous year dividend Dividend growth rate Dividend current year Horizon value Total Value Discount factor Discounted value
1 7.19 4.31% 7.499889 7.499889 1.0995 6.821181446
2 7.499889 4.31% 7.823134216 7.823134216 1.20890025 6.471281825
3 7.823134216 4.31% 8.160311301 291.915 300.0753113 1.329185825 225.7587357
Long term growth rate (given)= 6.96% Value of Stock = Sum of discounted value = 239.05
Where
Current dividend = Previous year dividend*(1+growth rate)^corresponding year
Unless dividend for the year provided
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 3 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor= (1+ Required rate)^corresponding period
Discounted value= total value/discount factor

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