Question

Lohn Corporation is expected to pay the following dividends over the next four years: $20, $16, $15, and $8.50. Afterward, the company pledges to maintain a constant 5 percent growth rate in dividends forever. If the required return on the stock is 15 percent, what is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Current share price=$1.49

Step-by-step explanation:

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

Current share price=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=(20+16+15+8.5)/4

D1=59.5/4=$14.875

k=15%

g=5%

Replacing;

Current share price=14.875/(15-5)

Current share price=14.875/10

Current share price=$1.49