Question

The Jackson-Timberlake Wardrobe Co. just paid a dividend of $1.20 per share on its stock. The dividends are expected to grow at a constant rate of 4 percent per year indefinitely. Investors require a return of 10 percent on the company's stock.

a. What is the current stock price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

b. What will the stock price be in 3 years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

c. 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.)

Answer 1

ans a)
	we can use divided growth model to compute the share price
	as per DDM
	price of stock = Expected divided next year/(required rate - growth rate)
	expected dividend next year = 1.2*104%					1.248
	Price =	=1.248/(10%-4%)
		$   20.80
ans b)	Price after 3 year = D4/(required rate - growth rate)
	D4 = 1.2*(104%)^4			$     1.40
	Price =	=1.4/(10%-4%)
		$   23.40
ans c)	Price after 10 year = D11/(required rate - growth rate)
	D11 = 1.2*(104%)^11			$     1.85
	Price =	=1.85/(10%-4%)
		$   30.79