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. Investors require a return of 10.5 percent on the company's stock. a. What is the current stock price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What will the stock price be in 3 years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. What will the stock price be in 15 years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

(a) $34.4

(b) $38.70(Approx).

(c) $61.9524

Explanation:

(a) Current price:

$=\frac{D1}{Required\ return-Growth\ rate}$

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

$=\frac{2.15\times 1.04}{0.105-0.04}$

      = $34.4

We use the formula:

$A=P(1+\frac{r}{100} )^{n}$

where,

A = future value

P = present value

r = rate of interest

n = time period

(b) $A=P(1+\frac{r}{100} )^{n}$

$A=34.4(1.04 )^{3}$

         = 34.4 × 1.124864

         = $38.6953

         = $38.70(Approx).

(c)  $A=P(1+\frac{r}{100} )^{n}$

$A=34.4(1.04 )^{15}$

         = 34.4 × 1.80094351

         = $38.6953

         = $61.9524