Question

West Side Corporation is expected to pay the following dividends over the next four years: $16, $12, $11, and $7.50. Afterward, the company pledges to maintain a constant 6 percent growth rate in dividends forever. If the required return on the stock is 16 percent, what is the current share price?

a. $63.27.
b. $61.40.
c. $68.82.
d. $65.17.
e. $60.11.

Answer 1

$77.81

Step-by-step explanation:

We are given that West Side Corporation is expected to pay the following dividends over the next four years: $16, $12, $11, and $7.50.

Required rate - 16%

Growth rate = 6%

We are supposed to find the current share price

Formula :
`P_0=\sum_(t=0)^(T)(D_T)/((1+r)^t)+(D_(T+1))/(r-G)(1+r)^(-T)`

D = Dividends

t = time

r = required rate

G= Growth rate

Substitute the values in formula :

`P_0=(16)/((1+0.16)^1)+(12)/((1+0.16)^2)+(11)/((1+0.16)^3)+(7.50)/((1+0.16)^4)+(7.50(1+0.06))/(0.16-0.06)(1+0.16)^(-4)\\P_0=77.81\\`