Question

The Jackson-Timberlake Wardrobe Co. just paid a dividend of $1.95 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 Jackson-Timberlake Wardrobe Co. stock, what is the current price? What will the price be in three years? In 15 years?

Answer 1

Answer:

If investors require a return of 10.5 percent on The Jackson-Timberlake Wardrobe Co. stock, what is the current price?

P₀ = Div₁ / (Re - g)

• Div₁ = $2.028
• Re = 10.5%
• g = 4%

P₀ = $2.028 / (10.5% - 4%) = $31.20

What will the price be in three years?

P₃ = Div₄ / (Re - g)

• Div₄ = $2.281
• Re = 10.5%
• g = 4%

P₃ = $2.281 / (10.5% - 4%) = $35.37

In 15 years?

P₁₅ = Div₁₆ / (Re - g)

• Div₁₆ = $3.652
• Re = 10.5%
• g = 4%

P₁₅ = $3.652 / (10.5% - 4%) = $56.19