Question

The Jackson-Timberlake Wardrobe Co. just paid a dividend of $1.1 per share on its stock. The dividends are expected to grow at a constant rate of 3 percent per year indefinitely. If investors require a 12 percent return on The Jackson-Timberlake Wardrobe Co. stock, what is the current price? Answer with 2 decimals (e.g. 10.12).

Answer 1

Dividend just Paid (D₀) = $1.10

Growth rate (g) = 3%

Require return = 12%

Current Price (P) = [(D₀) * (1 + g)] / (Ke - g)

P = [$1.10 * (1 + 0.03)] / (0.12 - 0.03)

P = $12.59

So, current price is $12.59