Final answer:
The current share price of Lohn Corporation is determined by summing the present value of the expected dividends over the next four years and the present value of all future dividends, discounted by the required return of 15% and assuming a 5% perpetual growth rate in dividends after the fourth year.
Step-by-step explanation:
To calculate the current share price of Lohn Corporation, we must first find the present value of the dividends expected in the next four years. The present value of each of these dividends is calculated by discounting them back to the present using the formula PDV = D / (1 + r)^t, where PDV is the present value, D is the dividend, r is the required return, and t is the time in years. Once we have calculated the present values for each of the dividends, we add them together to get the total present value of the dividends.
However, since Lohn Corporation plans to grow dividends at a perpetual growth rate after the fourth year, we also use the Gordon Growth Model to find the value of all dividends expected from the fifth year onward. This model is represented by the formula P = D / (r - g), where P is the price, D is the dividend at the start of the perpetual growth period, r is the required return, and g is the perpetual growth rate. In this case, we calculate P based on the dividend payment in the fourth year, which will grow at 5% annually afterwards.
Finally, we add the total present value of the individual dividends to the present value of the perpetual dividend to find out the current share price. This price represents how much the stock is worth today given the future dividends and the required return on the stock.