Lohn Corporation is expected to pay the following dividends over the next four years: $9, $7,...

Lohn Corporation is expected to pay the following dividends over the next four years: $9, $7, $3, and $1. 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?

Expert Solution

Compute the stock price at the end of year 4, using the equation as shown below:

Stock price = Year 4 dividend*(1 + Growth rate)/ (Required rate – Growth rate)

= $1*(1 + 0.04)/ (14% - 4%)

= $1.04/ 10%

= $10.40

Hence, the stock price at the end of year 4 will be $10.40.

Compute the current share price, using MS-excel as shown below:

The result of the above excel table is as follows:

Hence, the current share price is $22.056.

jeff jeffy answered 2 years ago

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