Question

Johnson, Inc. has made a commitment to pay the following dividends over the next four years: $7, $13, $18, and $3.25. At the end of this four year period, the firn has further commited to grow the dividend indefinitiely at a constant 5 percent growth rate. If you require a return on this stock of 8.4 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

The current share price will be "$106.70".

Step-by-step explanation:

Given over the stock of Johnson Inc,

Expected dividends averaging 4 years,

D1 = $7

D2 = $13

D3 = $18

D4 = $3.25

Rate of growing, g = 5%

Return required, rs = 8.4%

Thus, stock value for year four using just a constant dividend growth framework has been:

⇒
`P4=(D4* (1+g))/(rs-g)`

on putting the values in the above formula, we get

⇒
`=(3.25* 1.05)/(0.084-0.05)`

⇒
`= 100.37`

The current share price would seem to be a total amount of PV of future dividends as well as a discount of P4 at rs:

⇒
`P0=(D1)/((1+rs))+(D2)/((1+rs)^2)+(D3)/((1+rs)^3)+(D4)/((1+rs)^4)`

On putting values, we get

⇒
`=(7)/(1.084) +(13)/(1.084^2) +(18)/(1.084^3) +(3.25)/(1.084^4)`

⇒
`=106.70`