Laserclok Corporation paid a dividend for 50 years until it experienced financia
ID: 2706599 • Letter: L
Question
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? 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?Explanation / Answer
FIRST 5 YEARS = 0
HORIZON PERIOD THAT IS FROM 6TH YEAR
P5 = D6/Re-g
P5 = 2.2/0.15-0.05
P5=22
PRESENT VALUE OF P5=22/(1.15^5)
=10.93
THEREFORE PO = 0+10.93
=10.93
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