Question

Lohn Corporation is expected to pay the following dividends over the next four years: $16, $13, $8, and $4. Afterward, the company pledges to maintain a constant 7 percent growth rate in dividends forever. If the required return on the stock is 17 percent, what is the current share price

Answer 1

Answer:

P₀ = $53.14

Explanation:

Div₁ = $16

Div₂ = $13

Div₃ = $8

Div₄ = $4

Div₅ = $4.28

terminal value at year 4 = $4.28 / (17% - 7%) = $42.80

P₀ = $16/1.17 + $13/1.17² + $8/1.17³ + $4/1.17⁴ + $42.80/1.17⁵ = $13.68 + $9.50 + $4.99 + $2.13 + $22.84 = $53.14