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28 July, 05:42

Lohn Corporation is expected to pay the following dividends over the next four years: $18, $14, $13, and $7.50. Afterward, the company pledges to maintain a constant 4 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.)

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  1. 28 July, 08:45
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    current share price = $85.96

    Explanation:

    Find the PV of each dividend

    PV = FV / (1+r) ^t

    r = required return

    t = total duration

    PV (D1) = 18 / (1.14) = 15.78947

    PV (D2) = 14 / (1.14^2) = 10.77255

    PV (D3) = 13 / (1.14^3) = 8.774630

    PV (D4) = 7.50 / (1.14^4) = 4.44060

    PV (D5 onwards) is a two-step process, first PV of growing perpetuity;

    PV (D5 onwards) at yr4 = [7.50 * (1+0.04) ] / (0.14-0.04) = 78

    second, finding PV today; PV (D5 onwards) at yr 0 = 78 / (1.14^4) = 46.18226

    Add the PVs to get the current share price = $85.96
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