Lohn Corporation is expected to pay the following dividends over the next four y

Question

Lohn Corporation is expected to pay the following dividends over the next four years: $11, $7, $6, and $3.50. 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: $11, $7, $6, and $3.50. 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?

Explanation / Answer

price at T4 = 3.5 * 1,04/0.14-0.04 = 36.4

price = 11/1.14 + 7/1.14^2 + 6/1.14^3 + 3.5/1.14^4 + 36.4/1.14^4 = 42.71

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