Gamma Corp. is expected to pay the following dividends over the next four years: $5, $12, $18, and $1.80. 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?

Question

Business

Justice Mccullough

16 February, 13:01

Gamma Corp. is expected to pay the following dividends over the next four years: $5, $12, $18, and $1.80. 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?

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Answers (1)

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Cali Avila · Answer 1

The current share price is $37.49 (appx)

Explanation:

Consider the following calculations

current share price

= 5 / (1+0.14) + 12 / (1+0.14) ^2 + 18 / (1+0.14) ^3+1.8 / (1.0.14) ^4+1.8 / (0.14-0.04) * (1+0.14) ^4

=4.386+9.233+12.15+1.065+10.657

=$37.49 (appx)