Question

In: Accounting

Lohn Corporation is expected to pay the following dividends over the next four years: $13, $9,...

Lohn Corporation is expected to pay the following dividends over the next four years: $13, $9, $5, and $2. Afterward, the company pledges to maintain a constant 6 percent growth rate in dividends forever.

  

If the required return on the stock is 14 percent, what is the current share price?

Multiple Choice

  • $37.89

  • $46.65

  • $39.74

  • $38.58

  • $36.65

Solutions

Expert Solution

CALCULATION OF MARKET VALUE OF THE STOCK AT THE END OF 4TH YEAR
Formula P4 = D5 / Ke - g
Ke = Cost of Equity = Expected return = 14% = 0.14
g = Growth rate = 6% = 0.06
P4 = price of the stock at the end of 4th year
D5 = Dividend at the end of 5th year = $ 2 X 1.06 = $ 2.12
P4 = D5 / Ke - g
P4 = $ 2.12 / 0.14 - 0.06
P4 = $ 2.12 / 0.08
P4 = $ 26.50
CALCULATION OF CURRENT SHARE PRICE
Year   Dividend PVF of $ @ 14% Present Value
                         1 $                    13.00                   0.87719 $                        11.40
                         2 $                      9.00                   0.76947 $                          6.93
                         3 $                      5.00                   0.67497 $                          3.37
                         4 $                      2.00                   0.59208 $                          1.18
Stock Value P4                          4 $                    26.50                   0.59208 $                        15.69
Total $                        38.58
Answer = Option 4 = $ 38.58

Related Solutions

Lohn Corporation is expected to pay the following dividends over the next four years: $12, $9,...
Lohn Corporation is expected to pay the following dividends over the next four years: $12, $9, $8, and $3.50. Afterwards, the company pledges to maintain a constant 7 percent growth rate in dividends forever. If the required return on the stock is 14 percent, what is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)   Current share price $   
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?
Lohn Corporation is expected to pay the following dividends over the next four years: $7.48, $3.6,...
Lohn Corporation is expected to pay the following dividends over the next four years: $7.48, $3.6, $6.1, and $6.07. Afterward, the company pledges to maintain a constant 4.95 percent growth rate in dividends forever. If the required return on the stock is 7.06 percent, what is the current share price?
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?
Lohn Corporation is expected to pay the following dividends over the next four years: $16, $12,...
Lohn Corporation is expected to pay the following dividends over the next four years: $16, $12, $9, and $5. Afterward, the company pledges to maintain a constant 7 percent growth rate in dividends forever. If the required return on the stock is 15 percent, what is the current share price? Multiple Choice (A) $75.01 (B) $70.00 (C) $67.64 (D) $66.50 (E) $72.10
1.Lohn Corporation is expected to pay the following dividends over the next four years: $17, $15,...
1.Lohn Corporation is expected to pay the following dividends over the next four years: $17, $15, $10, and $5. Afterward, the company pledges to maintain a constant 4 percent growth rate in dividends forever. If the required return on the stock is 12 percent, what is the current share price? 2. A7X Corp. just paid a dividend of $1.30 per share. The dividends are expected to grow at 35 percent for the next 9 years and then level off to...
Far Side Corporation is expected to pay the following dividends over the next four years: $9,...
Far Side Corporation is expected to pay the following dividends over the next four years: $9, $5, $2, and $1. Afterward, the company pledges to maintain a constant 3 percent growth rate in dividends forever.    Required: If the required return on the stock is 10 percent, what is the current share price? (Do not round your intermediate calculations.)
Interfinn Corporation is expected to pay the following dividends over the next four years: $10, $7,...
Interfinn Corporation is expected to pay the following dividends over the next four years: $10, $7, $6, and $2.75. Afterwards, 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?
Far Side Corporation is expected to pay the following dividends over the next four years: $14,...
Far Side Corporation is expected to pay the following dividends over the next four years: $14, $11, $8, and $5. 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? (Do not round your intermediate calculations.) options: $69.86 $66.37 $67.30 $71.96 $75.23 Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over...
Chamberlain Corporation is expected to pay the following dividends over the next four years: $12.60, $8.60,...
Chamberlain Corporation is expected to pay the following dividends over the next four years: $12.60, $8.60, $7.60, and $3.10. Afterward, the company pledges to maintain a constant 4% growth rate in dividends forever. If the required return on the stock is 12%, what is the current share price? (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.) Current share price $
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT