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: $18, $14, $10, and $5.50. 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? (Round your answer to 2 decimal places. (e.g., 32.16))

Lohn Corporation is expected to pay the following dividends over the next four years: $18, $14, $10, and $5.50. 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? (Round your answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

**Terminal value = D4(1+growth)/(cost of equity-growth)

                        = 5.50 (1+ .04) / (.12-.04)

                       = 5.72 /.08

                       = $ 71.50

year Dividend present value @12% present value of dividend 1 18 .89286 16.07 2 14 .79719 11.16 3 10 .71178 7.12 4 5.50 .63552 3.50 4 71.50 .63552 45.44 current share price $ 83.29 per share

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