Question

Lohn Corporation is expected to pay the following dividends over the next four years: $12, $9, $8, and $3.50. Afterwards, the company pledges to maintain a constant 7 percent growth rate in dividends forever. If the required return on the stock is 14 percent, what is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Current share price

$

Answer 1

This question requires application of dividend discount model, according to which

where V4 is the terminal value, according to which

D5 = $3.50 * (1 + 7%) = $3.745