Question

Gamma Corp. is expected to pay the following dividends over the next four years: $7.50, $8.25, $15, and $1.80. Afterward, the company pledges to maintain a constant 4 percent growth rate in dividends, forever. If the required return is 14 percent, what is the current share price?A. $35.20B. $31.06C. $38.18D. $32.30E. $34.90

Answer 1

Answer:

$35.2

Explanation:

Let d1 = year 1 dividend;         d2 = year 2 dividend

      d3 = year 3 dividend;      d4 = year 4 dividend

      d5 = year 5 dividend = $1.8(1.04) =$1.872

Dividend   Value            [email protected]%     Present Value

d1               $7.50    (1.14)^-1 =0.877     $6.58

d2              $ 8.25   (1.14)^-2 =0.769    $6.35

d3              $15        (1.14)^-3 =0.675    $10.12

d4              $1.80     (1.14)^-4 =0.592     $1.07

p4              $18.72   0.592                    $11.08

Current price of the stock                  $35.20

Working for  p4 = 1.872/(14%-4%) = $1.87/10%

                          = $1.872/ 10%

                          = $1.87/0.1 = $18.72