Question

Lohn Corporation is expected to pay the following dividends over the next four years: $12, $10, $9, and $4. Afterward, the company pledges to maintain a constant 6 percent growth rate in dividends forever. If the required return on the stock is 15 percent, what is the current share price

Answer 1

Answer:

Price of the stock today = $53.14

Explanation:

given data

dividends year D1 = $12

dividends year D2 = $10

dividends year D3 = $9

dividends year D4 = $4

constant growth rate  = 6 percent

required return stock Kk = 15 percent

solution

we get here Price of the stock today that is

Price of the stock = $\frac{D1}{(1+ke)^1}+\frac{D2}{(1+ke)^2}+\frac{D3}{(1+ke)^3}+\frac{D4}{(1+ke)^4}+\frac{P4}{(1+ke)^4}$   .................1

here P4 =  $\frac{D5}{ke-g}$   .............2

and  where D5 = D4(1+g)    .............3

so here put value in equation 1

Price of the stock today  =  $\frac{12}{(1+0.15)^1}+\frac{10}{(1+0.15)^2}+\frac{9}{(1+0.15)^3}+\frac{4}{(1+0.15)^4}+\frac{4(1.06)}{(0.15-0.06)(1+0.15)^4}$    

Price of the stock today = 53.1368

Price of the stock today = $53.14