Question

The Jackson–Timberlake Wardrobe Co. just paid a dividend of $1.51 per share on its stock. The dividends are expected to grow at a constant rate of 4.59 percent per year indefinitely. Investors require a return of 8.19 percent on the company's stock. What will the stock price be in 10 years?

A) $3.27
B) $4.91
C) $5.62
D) $6.74

Answer 1

The stock price in 10 years will be approximately $6.74.

Step-by-step explanation:

The question involves calculating the future stock price using the dividend growth model, which is used to estimate the price of a stock with dividends that grow at a constant rate. The Jackson–Timberlake Wardrobe Co. has paid a dividend of $1.51, which is expected to grow at 4.59 percent per year. To find the stock price in 10 years, we use the formula for the price of a stock, P, with constant growth given by D1/(r-g), where D1 is the dividend next year, r is the required rate of return, and g is the growth rate.

First, calculate D1, which is the dividend expected next year:

D1 = D0 × (1 + g)

D1 = $1.51 × (1 + 0.0459) = $1.58 approximately.

Next, calculate the stock price in 10 years (P10) using the formula:

P10 = D1 × [(1 + g)^10] / (r - g)

P10 = $1.58 × [(1 + 0.0459)^10] / (0.0819 - 0.0459)

After calculating, the approximate stock price in 10 years would be around:

P10 = $1.58 × (1.59385) / 0.036

P10 ≈ $6.74

So, the stock price in 10 years would be $6.74, which corresponds to option D.