Question

Lohn Corporation is expected to pay the following dividends over the next four years: $9, $7, $3, and $1. Afterward, the company pledges to maintain a constant 8 percent growth rate in dividends forever.

  

If the required return on the stock is 13 percent, what is the current share price?

Answer 1

For find out the current market share price is present value of all future cashflow, So we discount the dividend cashflow and and we find the share price at end of 4th year by using gordon's growth model and discount it and all sum of that is current market price.

Year	Cashflow	DF @13%	PV
1	$9.00	0.8850	$7.96
2	$7.00	0.7831	$5.48
3	$3.00	0.6931	$2.08
4	$1.00	0.6133	$0.61
4th terminal	$21.60	0.6133	$13.25
Present Value	$29.39

Current Price of Share =$29.39

4th year terminal value= D1 / (Ke-g)

D1 = Next Year dividen

Ke = Return require

g = Growth require

so

4th Year terminal value = $1.08 / (0.13-0.08) = $1.08/0.05 = $21.60

Here D1 means 5th year dividend so dividen of 5th year = divind of 4th year x (1+g) = $1 x (1.08) = $1.08

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