Question

Far Side Corporation is expected to pay the following dividends over the next four years: $13, $12, $6, and $3. Afterward, the company pledges to maintain a constant 0.01 growth rate in dividends forever. If the required return on the stock is 0.12, what is the current share price?
a. $87.60.
b. $94.61.
c. $85.34.
d. $92.52.
e. $89.83.

Answer 1

Answer:

e. $89.83

Explanation:

Calculation to determine the current share price

First step is to calculate the Value after year 4 using this formula

Value after year 4=(D4*Growth rate)/(Required rate-Growth rate)

Let plug in the formula

Value after year 4=(4*1.05)/(0.1-0.05)

Value after year 4=$84

Now let calculate the current share price using this formula

Current share price=Future dividend and value*Present value of discounting factor(rate%,time period)

Let plug in the formula

Current share price=16/1.1+12/1.1^2+7/1.1^3+4/1.1^4+84/1.1^4

Current share price=$89.83(Approximately)

Therefore the current share price is $89.83