Synovec Co. is growing quickly. Dividends are expected to grow at a rate of 24 percent for the next three years, with the growth rate falling off to a constant 6 percent thereafter. If the required return is 14 percent, and the company just paid a dividend of $3.40, what is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e. g., 32.16.)

Question

Business

Kaitlyn Harding

13 October, 02:46

Synovec Co. is growing quickly. Dividends are expected to grow at a rate of 24 percent for the next three years, with the growth rate falling off to a constant 6 percent thereafter. If the required return is 14 percent, and the company just paid a dividend of $3.40, what is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e. g., 32.16.)

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Case Harper · Answer 1

The Current share price is $81.03.

Explanation:

Dividend Growth Model determines the share price of a company which offers perpetual dividend with stable growth. It is the expected dividend of a share divided by the net return rate of growth rate.

According to given data

Last dividend = D0 = $3.40

Rate of return = 14%

Growth rates:

For 3 years = 24% per year

After 3 years = 6% in perpetuity

Dividend after 3 years = D3 = 3.40 x (1 + 0.24) ^3 = $6.48

We can calculate the price of share using following formula:

Price of share = D3 / Rate of return - Growth rate

Price of share = $6.48 / 14% - 6% = $6.48 / 8% = $81.03