Question

Lohn Corporation is expected to pay the following dividends over the next four years: $16, $12, $11, and $7.50. Afterwards, the company pledges to maintain a constant 6 percent growth rate in dividends forever. If the required return on the stock is 16 percent, what is the current share price?

Answer 1

Current share price =$77.81

Step-by-step explanation:

Price of the stock today =
`(D1)/((1+ke)^1)+(D2)/((1+ke)^2)+(D3)/((1+ke)^3)+(D4)/((1+ke)^4)+(P4)/((1+ke)^4)`.

where P4 =
`(D5)/(ke-g)`

where D5 = D4(1+g)

Price of the stock today =
`(16)/((1+0.16)^1)+(12)/((1+0.16)^2)+(11)/((1+0.16)^3)+(7.50)/((1+0.16)^4)+(7.50(1.06))/((0.16-0.06)(1+0.16)^4)` = $77.81