Question

The Jackson-Timberlake Wardrobe Co. just paid a dividend of $1.85 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 12 percent on the company's stock. a. What is the current stock price?b. What will the stock price be in three years? c. What will the stock price be in 14 years?

Answer 1

The answers are:

A) $24.05

B) $27.05

C) $41.65

Step-by-step explanation:

This type of stock can be considered a perpetuity, since it pays dividends at a fixed rate indefinitely. The formula for calculating the current value of a perpetuity is:

Perpetuity = [dividend x (1 + g)] / (r - g)

where:

• dividend = $1.85
• g = 4%
• r = 12%

A) current value: perpetuity = $1.85 x 1.04 / (12% − 4%) =$1,924 / 8%= $24.05

B) value in three years: perpetuity = $1.85 x (1.04⁴) / 8% = $27.05

C) value in fourteen years: perpetuity = $1.85 x (1.04¹⁵) / 8% = $41.65