Question

The Jackson-Timberlake Wardrobe Co. just paid a dividend of $1.32 per share on its stock. The dividends are expected to grow at a constant rate of 5 percent per year indefinitely.

  

Required:
(a)	If investors require a 12 percent return on The Jackson-Timberlake Wardrobe Co. stock, what is the current price?
	(Click to select)   $19.40   $18.86   $20.20   $7.76   $19.80

  

(b)	What will the price be in 5 years?
	(Click to select)   $24.07   $25.78   $24.76   $25.27   $9.91

Answer 1

a) Current Stock Price (P₀):

Where,
D₁ = Dividend expected in year 1.
R = Expected return by investors
g = Dividend growth rate.

Now D₁ = D₀ + g .................(D₀ is the current dividend)
= $1.32 + 5% of 1.32
= $1.32 + $0.066
= $1.386

Substituting the values in the formula, we get:

b) Stock price in year 5 (P₅):

Here first we need to find D₅, for that we can use the future value formula:

So substituting the values in the formula, we get: