Question

J.C. Penney Company is expected to pay a dividend in year 1 of $1.65, a dividend in year 2 of $1.97, and a dividend in year 3 of $2.54. After year 3, dividends are expected to grow at the rate of 8% per year. An appropriate required return for the stock is 11%. The stock should be worth _______ today.

Answer 1

Answer:

$71.80

Explanation:

First, calculate the present value (PV) of each year's dividend at 11% required return;

PV(of D1) = 1.65 / (1.11) = 1.4865

PV(of D2) = 1.97 / (1.11²) = 1.5969

PV(of D3) = 2.54 / (1.11³) = 1.8572

Find D4 = 2.54(1+0.08) = 2.7432

Next find Present value PV of terminal cashflows

PV(of D4 onwards) = $\frac{\frac{2.7432}{0.11-0.08} }{(1.11)^{3} } \\ \\ =\frac{61.9067}{1.3676} \\ \\ = 66.8601$

Add the PVs to find the current value of the stock today;

= 1.4865 + 1.5969 + 1.8572 + 66.8601

= 71.8007

Therefore, it is worth $71.80