Johnson Corporation has just paid a dividend of $4.45. The company has forecasted a growth rate of 8 percent for the next several years. If the appropriate discount rate is 14 percent, what is the current price of this stock?

The answer is $80.20

Explanation:

This can be gotten through what will call Dividend Discount Model. It is one of the methods to determine the price of a company's stock.

The formula is:

Ke = D1/Po + g

Where D1 is the future dividend payment

Po is the present value of the stock

g is the growth rate

Ke is the cost of equity

D1 = $4.45 x 1.08 = $4.81

Ke = 0.14

g = 0.08

Therefore, Po = $4.81/0.14 - 0.08

=$4.81/0.06

=$80.20

Current stock price is $80.10

Explanation:

Current price of stock = Do * (1+g) / r-g

Do is the dividend that has just been paid of $4.45

g is the growth rate of dividend at 8%

r is the investor's expected rate of return of 14% also known as discount rate

Current price of stock=$4.45 * (1+8%) / 14%-8%

=$4.45*1.08/6%

=4.806 / 6%

=$80.10

The current price of the stock of Johnson corporation is $80.10 since a rational investor prices a stock at a price that reflects the dividend capacity of the stock in the future