# Finance Help

• November 2nd 2009, 04:14 PM
Hockey_Guy14
Finance Help
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?
• November 3rd 2009, 07:33 AM
LochWulf
Present-value the first 4 dividends the usual way (each one separately, then sum the results)...

$\displaystyle\sum_{k=1}^4 \frac{C_k}{(1+r)^k}$

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...

$P_4 \ = \ \frac{C_5}{r \ - \ g}$

...where $P_4, \ C_5, \ r, \ \text{and} \ g$ 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 $P_4$ price back four periods.

You could crunch this stuff into a single formula, but it's more instructive to see the pieces first.