Question

Latcher's 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 percent 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.

Answer 1

Answer: 6 years

Step-by-step explanation:

The Dividend Discount model allows us to calculate the value of a stock today given the dividend that it will pay next year as well as a constant rate of growth and a cost of capital.

As of the 7th year, the company will start paying dividends at a constant growth rate so using the Dividend discount model, the value of the stock can be calculated 6 years from the present.

That value can then be discounted to find out the present value.