Lohn Corporation is expected to pay the following dividends over the next four years: $11, $8,...

Lohn Corporation is expected to pay the following dividends over the next four years: $11, $8, $4, and $2. Afterward, the company pledges to maintain a constant 5 percent growth rate in dividends forever

. If the required return on the stock is 13 percent, what is the current share price?

Expert Solution

Answer - Current share price = 36.10

Workings

Stock price today is the present value of all the dividends

We have to solve this question into two parts

Step 1 - Calculation of Stock price at the end of year 4 (S4) by calculating the discounted value at year 4 of all the dividends after 4th year

D5 = D4 * (1+g) = 2 * 1.05 = 2.1

S4 = Dividend for the 5th year (D5) / Required return - growth rate

S4 = 2.1 / 0.13-0.05 = 26.25

Step 2 Calculation of Present value of dividend for the 1st 4 years and S4

Year	Particulars	Amount	Present Value Factor @ 13%	Present Value
1	D1	11	0.8850	9.73
2	D2	8	0.7831	6.27
3	D3	4	0.6931	2.77
4	D4	2	0.6133	1.23
4	S4	26.25	0.6133	16.10
			Stock Price today (S0)	36.10

jeff jeffy answered 1 year ago

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