Question

S08-18 Supernormal Growth [LO1]

Synovec Co. is growing quickly. Dividends are expected to grow at a rate of 30 percent for the next three years, with the growth rate falling off to a constant 4 percent thereafter. If the required return is 11 percent, and the company just paid a dividend of $2.45, what is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Current share price=

Answer 1

P0 = [D0(1 + g1) / (R − g1)]{1 − [(1 + g1) / (1 + R)]^t} + [(1 + g1) / (1 + R)]^t[D0(1 + g2) / (R − g2)]

P0 = [$2.45(1.30) / (0.11 − 0.30)][1 − (1.30 / 1.11)^3] + [(1.30) / (1.11)]^3[$2.45(1.04) / (0.11 − 0.04)]

P0 = $68.64