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?
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...
...whereare, 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 thatprice back four periods.
You could crunch this stuff into a single formula, but it's more instructive to see the pieces first.
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