Question

Leisure Lodge Corporation is expected to pay the following dividends over the next four years: $19.00, $10.00, $5.20 and $2.40. Afterwards, the company pledges to maintain a constant 3 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 intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

Step-1, Dividend per share for the next three years

Dividend in Year 1 (D1) = $19.00 per share

Dividend in Year 2 (D2) = $10.00 per share

Dividend in Year 3 (D3) = $5.20 per share

Dividend in Year 4 (D4) = $2.40 per share

Step-2, Calculation of Stock Price in Year 4 (P4)

Dividend Growth Rate (g) = 3% per year

Required Rate of Return (Ke) = 13%

Therefore, the Stock Price in Year 4 (P4) = D4(1 + g) / (Ke – g)

= $2.40(1 + 0.03) / (0.13 – 0.03)

= $2.4720 / 0.10

= $24.72 per share

Step-3, Current Price of the share

The Current price of the share is the present value of future dividend plus the present value of the share price in year 4

Year	Cash flow ($)	Present Value factor at 13%	Present Value of cash flows ($)
1	19.00	0.88496	16.81
2	10.00	0.78315	7.83
3	5.20	0.69305	3.60
4	2.40	0.61332	1.47
4	24.72	0.61332	15.16
TOTAL			$44.88

“Hence, the current share price would be $44.88”

NOTE

The Formula for calculating the Present Value Factor is [1/(1 + r)ⁿ], Where “r” is the Discount/Interest Rate and “n” is the number of years.