Question

Lohn Corporation is expected to pay the following dividends over the next four years: $12, $10, $9, and $4. Afterward, the company pledges to maintain a constant 6 percent growth rate in dividends forever. If the required return on the stock is 15 percent, what is the current share price

Answer 1

Price of the stock today = $53.14

Step-by-step explanation:

given data

dividends year D1 = $12

dividends year D2 = $10

dividends year D3 = $9

dividends year D4 = $4

constant growth rate = 6 percent

required return stock Kk = 15 percent

solution

we get here Price of the stock today that is

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

here P4 =
`(D5)/(ke-g)` .............2

and where D5 = D4(1+g) .............3

so here put value in equation 1

Price of the stock today =
`(12)/((1+0.15)^1)+(10)/((1+0.15)^2)+(9)/((1+0.15)^3)+(4)/((1+0.15)^4)+(4(1.06))/((0.15-0.06)(1+0.15)^4)`

Price of the stock today = 53.1368

Price of the stock today = $53.14