Latcher's Inc. is a relatively new firm that is still in a period of rapid development. The company plans on retaining all of its earnings for the next six years. Seven years from now,the company projects paying an annual dividend of $.25 a share and then increasing that amount by 3% annually thereafter. To value this stock as of today,you would most likely determine the value of the stock _____ years from today before determining today's value.
A) 4
B) 5
C) 6
D) 7
E) 8

Question

Quizplus · Accepted Answer

The company plans to retain all earnings for the next six years and then start paying dividends in year seven. Therefore, to determine the value of the stock as of today, we need to determine the present value of all future dividends starting in year seven. This means we need to discount the cash flows for six years before we can determine the present value today. Therefore, the value of the stock 6 years from today is the most relevant for valuing the stock today.