Leisure Lodge Corporation is expected to pay the following d

Leisure Lodge Corporation is expected to pay the following dividends over the next four years: $21.87, $13.42, $6.57 and $3.04. Afterwards, the company pledges to maintain a constant 4 percent growth rate in dividends forever. If the required return on the stock is 15 percent, what is the current share price?

Solution

P4 = D5/(r - g)

= D4(1 + g) / (r - g)

= $3.04(1.04) / (0.15 - 0.04)

= $3.1616 / 0.11 = $28.74

P0 = D1/(1 + r)¹ + D2/(1 + r)² + D3/(1 + r)³ + D4/(1 + r)⁴ + P4/(1 + r)⁴

= $21.87/1.15¹ + $13.42/1.15² + $6.57/1.15³ + $3.04/1.15⁴ + $28.74/1.15⁴

= $19.02 + $10.15 + $4.32 + $1.74 + $16.43 = $51.6561