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

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

ekkarill92 answered 2 years ago

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