Question

Johnson Corp. pays a constant $15 dividend on its stock. The company will maintain this dividend for the next 10 years and will then cease paying dividends forever. If the required return on this stock is 12 percent, what is the current share price

Answer 1

PV = $84.75334543 rounded off to $84.75

Step-by-step explanation:

The dividend payments can be said to be in the form of an annuity as the amount paid is constant. It is paid after equal intervals of time and it is paid for a limited period of time. Thus, all three conditions of an annuity are met. So, to calculate the price of the stock today, we will use the formula for the present value of annuity. We will use the formula for the present value of ordinary annuity. The formula is attached.

PV = 15 * [(1 - (1+0.12)^-10) / 0.12]

PV = $84.75334543 rounded off to $84.75