Question

1. The Jackson– Timberlake Wardrobe Co. just paid a dividend of $1.60 per share on its stock. The dividends are expected to grow at a constant rate of 6 percent per year indefinitely. If investors require a 12 percent return on the Jackson–Timberlake Wardrobe Co. stock, what is the current price? What will the price be in three years? In 15 years?

Answer 1

$28.27

$33.67

$67.74

Explanation:

The computation of current price, price be in three years and In 15 years is shown below:-

Stock current price = Next expected dividend ÷ (Required return - Growth rate)

= $1.60 × (1 + 6%) ÷ (12% - 6%)

= $1.60 × 1.06 ÷ 0.06

= $28.27

Stock price in three years = D4 ÷ (Required return - Growth rate)

= $1.60 × ((1 + 6%)^4) ÷ (12% - 6%)

= $1.60 × (1.06)^4) ÷ 0.06

= $1.60 × 1.26247696 ÷ 0.06

= 33.66605227

or

= $33.67

Stock price in 15 years = D16 ÷ (Required return - Growth rate)

= $1.60 × ((1 + 6%)^16) ÷ (12% - 6%)

= $1.60 × (1.06)^16) ÷ 0.06

= $1.60 × 2.540351685

÷ 0.06

= 67.74271159

or

= $67.74