You have been following a company, Lapstone, Inc., that is about to go public th

Question

You have been following a company, Lapstone, Inc., that is about to go public this afternoon. You are fairly certain that the company is unlikely to pay dividends for the first five years of its operations. At the end of the sixth year, you foresee receiving $3 per share as a dividend. You forecast that the seventh year’s dividend will also be $3.00 per share, the eighth year’s dividend will be $3.50 per share and after that dividends will grow at an annual rate of three percent forever. What would you pay for a share of Lapstone’s stock today if you wished to earn fifteen percent per annum on your investment?

Explanation / Answer

What would you pay for a share of Lapstone’s stock today

=3/(1+15%)^6+3/(1+15%)^7+(3.50/(15%-3%))/(1+15%)^7

=13.39

the above is answer..

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