Question

Q4) Lohn Corporation is expected to pay the following dividends over the next four years: $13, $9, $6, and $2.75. Afterward, the company pledges to maintain a constant 5 percent growth rate in dividends forever. If the required return on the stock 10.75 percent, what is the current share price

Answer 1

$58.70

Step-by-step explanation:

The computation of the current share price is shown below:

But before that we need to find out the value after year 4 which is shown below:

Value after year 4 is

= (D4 × Growth rate) ÷ (Required return - Growth rate)

= (2.75 × 1.05) ÷ (0.1075 - 0.05)

= $50.2173913

Now current share price is

= Future dividends × Present value of discounting factor(10.75%,time period)

= $13 ÷ 1.1075 + $9 ÷ 1.1075^2 + $6 ÷ 1.1075^3 + $2.75 ÷ 1.1075^4 + $50.2173913 ÷ 1.1075^4

= $58.70