Question

The Jackson-Timberlake Wardrobe Co. just paid a dividend of $1.75 per share on its stock. The dividends are expected to grow at a constant rate of 4 percent per year indefinitely. Investors require a return of 11 percent on the company's stock.

Required:
a. What is the current stock price?
b. What will the stock price be in 18 years?

Answer 1

(A) $26

(B) $52.67

Step-by-step explanation:

The Jackson Timberlake wardrobe corporation paid a dividend of $1.75 per share

The growth rate is 4%

= 4/100

= 0.04

The rate of return is 11%

= 11/100

= 0.11

(A) The current stock price can be calculated as follows

Current price= dividend ×(1+growth rate)/required return-growth rate

= $1.75×(1+0.04)/(0.11-0.04)

= 1.75× 1.04/0.07

= 1.82/0.07

= $26

(B) The amount of stock price in 18 years can be calculated as follows

= Current price × (1+growth rate)^18

= $26 × (1+0.04)^18

= $26 × 1.04^18

= $26 × 2.0258

= $52.67