Synovec Co. is growing quickly. Dividends are expected to grow at a rate of 20 percent for the next three years, with the growth rate falling off to a constant 8 percent thereafter. If the required return is 11 percent, and the company just paid a dividend of $1.45, what is the current share price?

current share price is $71.05

Explanation:

given data

grow at a rate = 20 percent

time = 3 year

growth rate falling off = 8 percent

dividend = $1.45

solution

we get here price of the stock in Year 3 that is 1 year before the constant dividend growth that is

P(3) = D(3) × (1 + g) ÷ (R - g)  .............1

P(3) = D0 (1 + g1)³ × (1 + g2) ÷ (R - g)

P(3) =

P(3) = $90.206  

and

then price of the stock today is present value of first three dividends  + present value of the Year 3 stock price

so price of the stock today is

P(0) =    

P(0) = $71.05

answerpurchase-occasion segmentation;