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

P0 = $86.52419 rounded off to $86.52

Explanation:

Using the two stage growth model of dividend discount model, we can calculate the price of the stock today. The DDM values a stock based on the present value of the expected future dividends from the stock. The formula to calculate the price of the stock today is,

P0 = D0 * (1+g1) / (1+r)  +  D0 * (1+g1)^2 / (1+r)^2  +  ...  +  D0 * (1+g1)^n / (1+r)^n  +  [(D0 * (1+g1)^n * (1+g2) / (r - g2)) / (1+r)^n]

Where,

P0 = 2.95* (1+0.25) / (1+0.1)  +  2.95 * (1+0.25)^2 / (1+0.1)^2  +  

2.95 * (1+0.25)^3 / (1+0.1)^3  +  

[(2.95 * (1+0.25)^3 * (1+0.04)  /  (0.1 - 0.04)) / (1+0.1)^3]

P0 = $86.52419 rounded off to $86.52