Question

Lohn Corporation is expected to pay the following dividends over the next four years: $16, $12, $11, and $6.50. Afterward, the company pledges to maintain a constant 5 percent growth rate in dividends forever. If the required return on the stock is 12 percent, what is the current share price?

Answer 1

Answer:

Intrinsic Value of the bond $90.69

Explanation:

$\left[\begin{array}{ccc}Year&Dividends&Present Value\\1&16&14.2857142857143\\2&12&9.56632653061224\\3&11&7.82958272594752\\4&92.8571428571429&59.0123929947343\\Intrinsic&Value&90.6940165370084\\\end{array}\right]$

The dividends value are givens:

Then on year 4 we apply the Dividends growth model

$\frac{divends}{return-growth} = Intrinsic \: Value$

$\frac{6.50 }{0.12-0.05} = Intrinsic \: Value$

Next step, we take all the values to present date

$\frac{Nominal}{(1+rate)^{time} } = PV$

Year 1 /1.12

Year 2 /1.12^2

Year 3 /1.12^3

Year 4 /1.12^4

Final step, we add them to get the intrinsic value of the bond today.