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

Question

Quizplus · Accepted Answer

To calculate the price of the stock,we need to find the present value of all future dividend payments and the future selling price at the end of the holding period,which is assumed to be infinite.Here is the calculation:

PV = [($2.10*1.05^5)/(.15-.05)]/(1+.15)^5 + [($2.10*1.05^6)/(.15-.05)]/(1+.15)^6 + [($2.10*1.05^7)/(.15-.05)]/(1+.15)^7+...

PV = $4.20/1.15^5 + $4.41/1.15^6 + $4.63/1.15^7 +...

PV = $1.92

Therefore, the price of the stock should currently be selling in the financial markets for $10.44 (=$1.92/.184).Therefore,the correct answer is B.

Laserclok Corporation Paid a Dividend for 50 Years Until It