Leisure Lodge Corporation is expected to pay the following dividends over the ne

Question

Leisure Lodge Corporation is expected to pay the following dividends over the next four years: $24, $15, $5.6 and $2.8. Afterwards, the company pledges to maintain a constant 5 percent growth rate in dividends forever. If the required return on the stock is 11 percent, what is the current share price? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Leisure Lodge Corporation is expected to pay the following dividends over the next four years: $24, $15, $5.6 and $2.8. Afterwards, the company pledges to maintain a constant 5 percent growth rate in dividends forever. If the required return on the stock is 11 percent, what is the current share price? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Explanation / Answer

To calculate the current share price, we need to determine the present value of all of the future dividends and price at the end of year 4. The formula for calculating current share price is:

Current Share Price = D1/(1+Required Return)^1 + D2/(1+Required Return)^2 + D3/(1+Required Return)^3 + D4/(1+Required Return)^4 + D4*(1+Growth Rate)/(1+Required Return)^4*(Required Return - Growth Rate) wher D1 = Dividend in Year 1, D2 = Dividend in Year 2, D3 = Dividend in Year 3 and D4 = Dividend in Year 4

____________

Solution:

Here, D1 = $24, D2 = $15, D3 = $5.6, D4 = $2.8, Required Return = 11% and Growth Rate = 5%

Using these values in the above formula for current share price, we get,

Current Share Price = 24/(1+11%)^1 + 15/(1+11%)^2 + 5.6/(1+11%)^3 + 2.8/(1+11%)^4 + 2.8*(1+5%)/(11%-5%)*(1+11%)^4 = $72.01 (answer)

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