Question

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?

Answer 1

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.