Question

Synovec Co. is growing quickly. Dividends are expected to grow at a rate of 25 percent for the next three years, with the growth rate falling off to a constant 4 percent thereafter. If the required return is 10 percent, and the company just paid a dividend of $2.95, what is the current share price?

A) $47.68
B) $51.20
C) $44.85
D) $55.40

Answer 1

The current share price of Synovec Co. is $58.50.

Step-by-step explanation:

To calculate the current share price of Synovec Co., we need to calculate the present value of future dividends and the constant growth perpetuity.

First, let's calculate the present value of the dividends for the next three years:

• Year 1: $2.95 * (1 + 0.25) / (1 + 0.10) = $2.68
• Year 2: $2.95 * (1 + 0.25)^2 / (1 + 0.10)^2 = $2.37
• Year 3: $2.95 * (1 + 0.25)^3 / (1 + 0.10)^3 = $2.10

Next, let's calculate the present value of the constant growth perpetuity:

Year 4 and beyond: $2.95 * (1 + 0.04) / (0.10 - 0.04) = $51.35

Finally, we can add the present values of the dividends and the constant growth perpetuity to get the current share price:

$2.68 + $2.37 + $2.10 + $51.35 = $58.50

Therefore, the current share price of Synovec Co. is $58.50.