LK Inc. does not currently pay dividends. The company will start with $1.00 dividend at the end of the year three and grow it by 10% for each of the next seven years until it nearly reaches $2.00. After seven years of growth, it will fix dividend at $1.00 forever. The equity cost of capital of LK Inc. is 8%. Required:

(a) Determine the value of LKs stock today.

(b) Why do stock prices often change very quickly?

(c) LKs Chief Finance Officer (CFO) has been referring to the various theories on the optimal capital structure to determine the target capital structure of LK. One of them is the trade-off theory. Briefly explain the trade-off theory of capital structure.