Laserclok Corporation paid a dividend for 50 years until it experienced financial difficulty three years ago, at which ti dividend payment was suspended (that is, a dividend has not been paid during the past three years).The company is much stronger financially, but Laserclok does not expect to pay a dividend for the next five years.Beginning six year today, the company will pay a dividend equal to $2.10, which is 5 percent greater than the last dividend paid three yea After the dividend payments start again, Laserclok expects the dividend to continue to be paid and to grow at a const of 5 percent.If the appropriate market rate for investments similar to Laserclok's stock is 15 percent, at what price sh the stock currently be selling in the financial markets?

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Quizplus · Accepted Answer

The stock price can be calculated using the dividend discount model for a growing perpetuity. The dividend in year 6 is $2.10, and it will grow at 5% annually. The present value of this perpetuity starting in year 6 can be calculated using the formula: P = D / (r - g), where D is the dividend, r is the discount rate, and g is the growth rate. The present value of this amount needs to be discounted back to the present value using the formula: PV = P / (1 + r)^n, where n is the number of years until the first dividend is paid.

Laserclok Corporation Paid a Dividend for 50 Years Until It