Question

The Jackson-Timberlake Wardrobe Co. just paid a dividend of $2.15 per share on its stock. The dividends are expected to grow at a constant rate of 4 percent per year indefinitely. If investors require a return of 10.5 percent on the company’s stock,
(a)-What is the current price?

(b)-What will the price be in three years?

(c-)-What will the price be 15 years?

Answer 1

Answer:

a)  

$34.4

b)

$37.20

c) $59.57

Explanation:

Given:

Dividend paid = $2.15

Growth rate = 4% = 0.04

Required return = 10.5% = 0.105

Now,

a) Present value = $\frac{\textup{Dividend paid}\times\textup{(1 +growth rate)}^n}{\textup{(Required return-Growth rate)}}$

for the current price n = 1

thus,

Current price = $\frac{\textup{Dividend paid}\times\textup{(1+growth rate)}^n}{\textup{(Required return-Growth rate)}}$

=  $\frac{\textup{2.15}\times\textup{(1 +0.04)}^1}{\textup{(0.105-0.04)}}$

=  $34.4

b) Price in 3 years

i.e n = 3

= $\frac{\textup{Dividend paid}\times\textup{(1 +growth rate)}^n}{\textup{(Required return-Growth rate)}}$

=  $\frac{\textup{2.15}\times\textup{(1 +0.04)}^3}{\textup{(0.105-0.04)}}$

=

$37.20

c) Price in 15 years

i.e n = 15

= $\frac{\textup{Dividend paid}\times\textup{(1 +growth rate)}^n}{\textup{(Required return-Growth rate)}}$

=  $\frac{\textup{2.15}\times\textup{(1 +0.04)}^{15}}{\textup{(0.105-0.04)}}$

=  $59.57