The Jackson–Timberlake Wardrobe Co. just paid a dividend of $1.03 per share on its stock. The dividends are expected to grow at a constant rate of 2.75 percent per year indefinitely. Investors require a return of 6.74 percent on the company's stock.
What will the stock price be in 10 years?
| As per Dividend discount model, | |||||||||
| Share price = Dividend at the end of year / (Required rate of return - growth rate) | |||||||||
| Growth rate = 2.75% | |||||||||
| Required rate of return = 6.74% | |||||||||
| To calculate share price at the end of 10th year, we need to determine dividend at the end of 11th year | |||||||||
| Dividend at the end of 11th year = (1.03*(1.0275^11)) | |||||||||
| Dividend at the end of 11th year = $1.39 | |||||||||
| Stock price in 10th year = 1.39 / (6.74%-2.75%) | |||||||||
| Stock price in 10th year = $34.84 | |||||||||
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