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  1. #1
    Junior Member
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    Jan 2008
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    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?
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  2. #2
    Junior Member
    Joined
    Jun 2009
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    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.
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