Question

Apocalyptica Corporation is expected to pay the following dividends over the next four years: $5.60, $16.60, $21.60, and $3.40. Afterwards, the company pledges to maintain a constant 5.25 percent growth rate in dividends, forever. Required: If the required return on the stock is 9 percent, what is the current share price?

Answer 1

Current share price=$3.15

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=(5.6+16.6+21.6+3.4)/4

D1=47.2/4=$11.8

k=9%

g=5.25%

Replacing;

Current share price=11.8/(9-5.25)

Current share price=11.8/3.75

Current share price=$3.15