Lohn Corporation is expected to pay the following dividends over the next four years: $19, $15, $14, and $5.50. Afterward, the company pledges to maintain a constant 3 percent growth rate in dividends forever. If the required return on the stock is 10 percent, what is the current share price? (Round your answer to 2 decimal places. (e. g., 32.16))

Question

Business

Ruben Ryan

16 August, 22:19

Lohn Corporation is expected to pay the following dividends over the next four years: $19, $15, $14, and $5.50. Afterward, the company pledges to maintain a constant 3 percent growth rate in dividends forever. If the required return on the stock is 10 percent, what is the current share price? (Round your answer to 2 decimal places. (e. g., 32.16))

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Answers (1)

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Destinee Montgomery · Answer 1

Current share price=$1.91

Explanation:

The current share price of the stock can be expressed as;

Current stock value=D1 / (k-g)

where;

D1=Expected annual dividend per share

k=required rate of return

g=growth rate of dividend

In our case;

D1=Average dividend per share = (19+15+14+5.5) / 4

D1=47.2/4=$13.375

k=10%

g=3%

Replacing;

Current share price=13.375 / (10-3)

Current share price=13.375/7

Current share price=$1.91