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

a)

$34.4

b)

$37.20

c) $59.57

Step-by-step 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}*\textup{(1 +growth rate)}^n}{\textup{(Required return-Growth rate)}}`

for the current price n = 1

thus,

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

=
`\frac{\textup{2.15}*\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}*\textup{(1 +growth rate)}^n}{\textup{(Required return-Growth rate)}}`

=
`\frac{\textup{2.15}*\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}*\textup{(1 +growth rate)}^n}{\textup{(Required return-Growth rate)}}`

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

= $59.57