Question

Far Side Corporation is expected to pay the following dividends over the next four years: $10, $9, $7, and $2. Afterward, the company pledges to maintain a constant 6 percent growth rate in dividends forever. If the required return on the stock is 16 percent, what is the current share price

Answer 1

Answer:

$32.61  

Explanation:

The stock price is the present value of all future expected dividends plus the present value of dividend terminal value as computed below:

Present value of dividend=expected dividend/(1+required return)^n

n is the year in which the dividend is expected, for the n for a dividend of $7 is 3 since it is expected in year 3.

Terminal value=year  4 dividend*(1+growth rate)/(required return-growth rate)

Terminal value=$2*(1+6%)/(16%-6%)=$21.20

price of stock=$10/(1+16%)^1+$9/(1+16%)^2+$7/(1+16%)^3+$2/(1+16%)^4+$21.20/(1+16%)^4

price of stock=$32.61