Question

The Jackson-Timberlake Wardrobe Co. just paid a dividend of $1.70 per share on its stock. The dividends are expected to grow at a constant rate of 5 percent per year indefinitely. Investors require a return of 15 percent on the company's stock.a. What is the current stock price?

Answer 1

Current stock price is $17.00

Step-by-step explanation:

The formula for computing the current stock price is given as current dividend/expected rate of return-dividend growth rate)

current dividend is $1.70

investor's expected rate of return is 15%

dividend growth rate is 5%

current stock price=$1.70/(15%-5%)

=$17.00

The current stock price is valued at $17 taking into consideration the dividends earning capacity of the stock as a rational investor pays a stock based on the potential dividends the stock is capable of paying in future.