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

Answer 1

Answer:

The Current price of stock $35.20

Explanation:

The computation of the current share price is shown below:

Particulars         Dividend     PVF at 14%      Present value

D1                       $ 7.50        0.877       $6.58

D2                    $8.25        0.769       $6.35

D3                    $15.00  0.675       $10.12

D4                     $1.80         0.592        $1.07

D5                    $1.87  

P4                    $18.72          0.592       $11.08

                    1.87 ÷ (14% - 4%)  

Current price of stock               $35.20