Far Side Corporation is expected to pay the following dividends over the next fo

Question

Far Side Corporation is expected to pay the following dividends over the next four years: $16, $12, $8, and $5. Afterward, the company pledges to maintain a constant 7 percent growth rate in dividends forever.

If the required return on the stock is 14 percent, what is the current share price?

Far Side Corporation is expected to pay the following dividends over the next four years: $16, $12, $8, and $5. Afterward, the company pledges to maintain a constant 7 percent growth rate in dividends forever.

Explanation / Answer

Current share price = D1/(1+Ke)^1+D2/(1+Ke)^2+D3/(1+Ke)^3+D4/(1+Ke)^4+D5/(Ke-g)*1/(1+Ke)^4

= 16/(1+0.14)^1+12/(1+0.14)^2+8/(1+0.14)^3+5/(1+0.14)^4+5.35/(0.14-0.07)*1/(1+0.14)^4

= (16*0.8772)+(12*0.7695)+(8*0.6750)+(5*0.5921)+(76.43*0.5921)

= 76.8807

*

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