| 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. |
| What is the current stock price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| Current price | $ |
| 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.) |
| Stock price | $ |
| What will the stock price be in 18 years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| Stock price |
Answer :
Current price of the stock is = $ 26
the stock price be in three years = $ 29.29
the stock price be in 18 years = $ 46.86
Working notes for above answer :
Current price of the stock is calculated as follow
P = D / ( K-G)
D = Expected dividend per share one year from now
k = Required rate of return for equity investor
G = Growth rate in dividends (in perpetuity)
Po = 1.75 * 1.04 /.11.-04
= 26
the stock price be in three years is calculated as follow
in three years, the next dividend D4 = 1.75(1.04^4)
= $2.047
= $2.047, say $2.05
in three years =2.05/(0.11 – 0.04)
= $29.29 =price in 3 years
in 15 years, the next dividend D16 = 1.75(1.04^16)
= $3.277, say $3.28
in 15 years price = 3.28 / (0.11 – 0.04)
= $46.8571
= $ 46.86 =price in 15 years
