Question

The Jackson-Timberlake Wardrobe Co. just paid a dividend of $1.50 per share on its stock. The dividends are expected to grow at a constant rate of 5 percent per year indefinitely. Investors require a return of 10 percent on the company's stock. What is the current stock price? (Do not round intermediate calculations and round your answer to2 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 10 years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Stock price

Answer 1

Dividend paid Growth rate of dividend Expected rate of return Expected annual dividend for following year i.e. D1$1.575 (S1.50 X 1.05) $1.50 5% 10% Expected annual dividend per share for following year/ (rate of return- dividend growth rate) Share price 1 Current share price $1.575/ (0.10- 0.05) $31.50 Current share price Expected annual dividend per share for following year after 3 years/ (rate of return- dividend growth rate) ($1.50 X 1.05^4)-$1.82325 1.82325/ (0.10- 0.05) $36.46 2 Share price after 3 years Expected annual dividend for following year i.e. D4 Share price after 3 years Expected annual dividend per share for following year after 10 years/ (rate of return- dividend growth rate) 3 Share price after 10 years Expected annual dividend for following year i.e. D11 ($1.50 X1.05A11)-$2.5655 Share price after 3 years $2.5655/ (0.10- 0.05) $51.31