Question

All answers must be entererd as formulas

CHAPTER 7 Help Save & Exit Submit Clipboard Styles E F G H I J The Jackson-Timberlake Wardrobe Co. just paid a dividend of $1.95 per share on its stock. The dividends are expected to grow at a constant rate of 4 percent per year indefinitely. If investors require a return of 10.5 percent on the stock, what is the current price? What will the price be in three years? In 15 years? 1.95 10.5% Current dividend Dividend growth rate Required return Price in Year Price in Year Price in Year Complete the following analysis. Do not hard code values in your calculations.

Answer 1

Part-1:

Current Dividend (D0) = $1.95

Growth rate (g) = 4% per year

Expected Dividend for the next year (D1) = D0*(1+g) = 1.95*(1+0.04) = 1.95*1.04 = $2.028

Therefore, Dividend in one year = $2.028

Required rate of return (Re) = 10.5%

Current price of the stock (P0) = ? ,

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As per Constant Dividend Growth Model (Gordon’s Model)

Current price of the Stock (Po) = D1/(Re-g)

P0 = 2.028/(0.105-0.04)

P0 = 2.028/0.065

P0 = 31.20

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.

Therefore, Current Price of Stock is $31.20

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Part-2:

Dividend in 4 years = 1.95*(1.04^4) = $2.2812

Price of the Stock in 3 years = Expected Dividend for 4^th year/(RE-g)

= 2.2812/(0.105-0.04)

= 2.2812/0.065

= $35.10

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Alternatively it can be calculated as follows:

=Current Stock Price*(1+growth rate)^No. of years

=31.20*(1.04^3)

=$35.10

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Part-3:

Dividend in 16 years = 1.95*(1.04^16) = $3.6523

Price of the Stock in 15 years = Expected Dividend for 16^th year/(RE-g)

= 3.6523/(0.105-0.04)

= 3.6523/0.065

= $56.19

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Alternatively it can be calculated as follows:

=Current Stock Price*(1+growth rate)^No. of years

=31.20*(1.04^15)

=$56.19