Question

Lohn Corporation is expected to pay the following dividends over the next four years: $19, $15, $14, and $5.50. Afterward, the company pledges to maintain a constant 3 percent growth rate in dividends forever. If the required return on the stock is 10 percent, what is the current share price? (Round your answer to 2 decimal places. (e.g., 32.16))

Answer 1

Current share price=$1.91

Step-by-step explanation:

The current share price of the stock can be expressed as;

Current stock value=D1/(k-g)

where;

D1=Expected annual dividend per share

k=required rate of return

g=growth rate of dividend

In our case;

D1=Average dividend per share=(19+15+14+5.5)/4

D1=47.2/4=$13.375

k=10%

g=3%

Replacing;

Current share price=13.375/(10-3)

Current share price=13.375/7

Current share price=$1.91