Question

The Jackson–Timberlake Wardrobe Co. just paid a dividend of $1.65 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 12 percent on the company's stock.

A. What is the current stock price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

B. What will the stock price be in three years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

C. What will the stock price be in 14 years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

a. The price of the stock today is $24.75

b. The price of the stock in three years will be $28.65

c. The price of the stock in 14 years will be $49.00

Step-by-step explanation:

The stock is a constant dividend paying stock so the constant growth model of the DDM will be used to calculate the price of the stock. The formula for constant growth model to calculate price of the stock today is:

P0 = D1 / r - g

Where,

• D1 is the dividend next year of D0 * (1+g)
• r is the required rate of return
• g is the growth rate in dividends

a.

The current price of the stock is:

P0 = 1.65 * (1+0.05) / (0.12 - 0.05)

P0 = $24.75

b.

To calculate the price of the stock today, we use the expected dividend for the next period. To calculate the stock price in three years, we will use D4.

P3 = 1.65 * (1+0.05)^4 / (0.12 - 0.05)

P3 = $28.65

c.

To calculate the price in 14 years, we will use D15.

P14 = 1.65 * (1+0.05)^15 / (0.12 - 0.05)

P14 = $49.00