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Lohn Corporation is expected to pay the following dividends over the next four years: $18, $14, $13, and $8.50. Afterward, the company pledges to maintain a constant 4 percent growth rate in dividends forever. If the required return on the stock is 14 percent, what is the current share price

Respuesta :

Answer:

The current share price is $ 92.71

Explanation:

To reach the current share price you have to calculate first the value after year 4, hence:

Value after year 4 is= (Dividends4×Growth Rate)/(Required return-Growth Rate)

=(8.5*1.04)/(0.14-0.04)

=$88.4

After having calculated the value after year 4, we can go on with the calculation of the current share price

Current share price is=Future dividends and value×Present value of discounting factor(rate%,time period)

=18/1.14+14/1.14^2+13/1.14^3+8.5/1.14^4+88.4/1.14^4

= $ 92.71

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