South Side Corporation is expected to pay the following dividends over the next

Question

South Side Corporation is expected to pay the following dividends over the next four years: $15, $11, $10, and $6.50. Afterward, the company pledges to maintain a constant 5 percent growth rate in dividends forever. If the required return on the stock is 12 percent, what is the current share price? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

South Side Corporation is expected to pay the following dividends over the next four years: $15, $11, $10, and $6.50. Afterward, the company pledges to maintain a constant 5 percent growth rate in dividends forever. If the required return on the stock is 12 percent, what is the current share price? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Explanation / Answer

Calculation of current share price using Dividend Growth formula : Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Dividend   $ 15.000 $ 11.000 $ 10.000 $      6.500 $        6.825 (6.5*105%) Share price = Expected Dividend / (Required rate -growth rate ) = 6.825 /(12%-5%) $    97.500 Total Cash inflows (A) $            -   $ 15.000 $ 11.000 $ 10.000 $ 104.000 PVF (12%) (B) $     1.000 $     0.893 $     0.797 $     0.712 $      0.636 Present value of cash flows (A*B) $            -   $ 13.393 $     8.769 $     7.118 $    66.094 Current Shares Price (Sum) $     95.37

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