Lohn Corporation is expected to pay the following dividends over the next four years: $16, $12, $11, and $7.50. Afterwards, the

Question

3 years ago

8

Lohn Corporation is expected to pay the following dividends over the next four years: $16, $12, $11, and $7.50. Afterwards, the

company pledges to maintain a constant 6 percent growth rate in dividends forever. If the required return on the stock is 16 percent, what is the current share price?

Business

1 answer:

andreev551 [17] · Answer 1 · 2022-07-23T16:05:07+03:00

andreev551 [17]3 years ago

8 0

Answer:

Current share price =$77.81

Explanation:

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

where P4 = $\frac{D5}{ke-g}$

where D5 = D4(1+g)

Price of the stock today = $\frac{16}{(1+0.16)^1}+\frac{12}{(1+0.16)^2}+\frac{11}{(1+0.16)^3}+\frac{7.50}{(1+0.16)^4}+\frac{7.50(1.06)}{(0.16-0.06)(1+0.16)^4}$ = $77.81