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10 September, 04:59

Synovec Corporation is expected to pay the following dividends over the next four years: $6.20, $17.20, $22.20, and $4.00. Afterward, the company pledges to maintain a constant 5.5 percent growth rate in dividends forever. If the required return on the stock is 9 percent, what is the current share price

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  1. 10 September, 06:20
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    Current price = $125.56

    Explanation:

    According to the dividend valuation model, the value of a share is the present value (PV) of its future expected dividend discounted at the required rate of return.

    We will sum the PV of its future dividends as follows:

    PV in year 1 = 6.20 * 1.09^ (-1) = 5.69

    PV in year 2 = 17.20 * 1.09^ (-2) = 14.48

    PV in year 3 = 22.20 * 1,09^ (-3) = 17.14

    PV in year 4 = 4 * 1.09^ (-4) = 2.83

    PV in year 5 and beyond = (4 * 1.055) / (0.09-0.055) * 1.09^ (-4) = 85.42

    Current price = 5.69 + 14.48 + 17.14 + 2.83 + 85.42 = 125.56

    Current price = $125.56
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Home » Business » Synovec Corporation is expected to pay the following dividends over the next four years: $6.20, $17.20, $22.20, and $4.00. Afterward, the company pledges to maintain a constant 5.5 percent growth rate in dividends forever.
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