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, $13, and $8.50. Afterwards, 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: $18, $14, $13, and $8.50. Afterwards, 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

Terminal value = 8.50 (1+.04) / (.14 -.04)

                    = 8.50 * 1.04 / .10

                    = 8.84 / .10

                    = $ 88.4

year Dividend Present value @14% present value of dividend 1 18 .87719 15.7894 2 14 .76947 10.7726 3 13 .67497 8.7746 4 8.50 .59208 5.0327 Terminal value at year4 88.4 .59208 52.3399 Current price 92.71

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