Synovec Co. is growing quickly. Dividends are expected to grow at a rate of 26 percent for the next three years, with the growth rate falling off to a constant 6 percent thereafter. If the required return is 12 percent, and the company just paid a dividend of $1.90, what is the current share price?

$ 55.04  

Explanation:

Year 1 dividend=$1.90*(1+26%)=$2.394

Year 2 dividend=$2.394 *(1+26%)=$3.01644

Year 3 dividend=$3.01644 *(1+26%)=$3.8007144

Terminal value of dividend=Year 3 dividend*(1+terminal growth rate)/(required return-terminal growth rate)

Terminal value of dividend=$3.8007144 *(1+6%)/(12%-6%)=$67.1459544

The current share price is the present value of expected dividends and terminal value as below:

share price=$2.394 /(1+12%)^1+$3.01644 /(1+12%)^2+$3.8007144 /(1+12%)^3+$67.1459544/(1+12%)^3

share price=$55.04  

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