Question

#4

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

Dividend in Year 1, D1 = $7.00
Dividend in Year 2, D2 = $13.00
Dividend in Year 3, D3 = $18.00
Dividend in Year 4, D4 = $3.25

Growth Rate, g = 5.00%
Required Return, rs = 8.40%

Dividend in Year 5, D5 = D4 * (1 + g)
Dividend in Year 5, D5 = $3.25 * 1.05
Dividend in Year 5, D5 = $3.4125

Stock Price in Year 4, P4 = D5 / (rs - g)
Stock Price in Year 4, P4 = $3.4125 / (0.084 - 0.05)
Stock Price in Year 4, P4 = $3.4125 / 0.034
Stock Price in Year 4, P4 = $100.36765

Current Stock Price, P0 = $7.00/1.084 + $13.00/1.084^2 + $18.00/1.084^3 + $3.25/1.084^4 + $100.36765/1.084^4
Current Stock Price, P0 = $106.70