Benson Inc. is expected to pay the following dividends over the next four years: $7, $8, $4, and $2.50. Afterwards, the company pledges to maintain a constant 6 percent growth rate in dividends, forever. If the required return on the stock is 15 percent, what is the current share price?
Can anyone help me out with this?
Nov 3rd 2009, 07:33 AM
Present-value the first 4 dividends the usual way (each one separately, then sum the results)...
To that total you'll add the PV of the dividend stream which starts at the end of year 5 and continues indefinitely.
Use the constant-growth model...
...where are, respectively, the value of the dividend stream priced at the end of year 4; the expected dividend paid at the e.o.y. 5; your discount rate; and your growth rate. (For that end-of-year-5 expected dividend, use the year-4 dividend and apply the growth rate.)
Finally, discount that price back four periods.
You could crunch this stuff into a single formula, but it's more instructive to see the pieces first.