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

Current stock price = $28.267

Stock price after 3 year = $33.66

Stock price after 15 year = $67.74

Step-by-step explanation:

Given:

Dividend = $1.60 per share

Growth rate = 6%

Rate of return = 12%

Find:

Current stock price = ?

Stock price after 3 year = ?

Stock price after 15 year = ?

Computation:

Current stock price = Dividend for next year / (Rate of return - Growth rate)

Current stock price = $1.60(1+6%) / [12%-6%]

Current stock price = $1.60(1.06) / [6%]

Current stock price = $1.696 / [6%]

Current stock price = $28.267

Stock price after 3 year = Dividend for next year / (Rate of return - Growth rate)

Stock price after 3 year = $1.60(1+6%)⁴ / (12%-6%)

Stock price after 3 year = $33.66

Stock price after 15 year = Dividend for next year / (Rate of return - Growth rate)

Stock price after 15 year = $1.60(1+6%)¹⁶ / (12%-6%)

Stock price after 15 year = $67.74