Universal Laser, Onc., just paid a dividend of $2.75 on its stock. The growth ra

Question

Universal Laser, Onc., just paid a dividend of $2.75 on its stock. The growth rate in dividends is expected to be a constant 6% per year, indefinitely. Investors require a 16% return on the stock for the first three years, a 14 % return for the next three years, and then an 11% return thereafter. What is the current price for the stock?

Explanation / Answer

D0 = 2.75 g = 6% = 0.06 P0 = D1/1.16 +D2/1.16^2 +D3/1.16^3 + D4/1.14^4 + D5/1.14^5 +D6/1.14^6 + D7/((0.11-0.06)*1.16^3 *1.14^3) => P0 = 2.75*1.06/1.16 +2.75*1.06^2 /1.16^2 +2.75*1.06^3 /1.16^3 + 2.75*1.06^4 /1.14^4 + 2.75*1.06^5 /1.14^5 +2.75*1.06^6 /1.14^6 + 2.75*1.06^7/((0.11-0.06)*1.16^3 *1.14^3) => P0 = 48.41 ($) (ANSWER)

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