Question

The Jackson–Timberlake Wardrobe Co. just paid a dividend of $1.81 per share on its stock. The dividends are expected to grow at a constant rate of 1.01 percent per year indefinitely. Investors require a return of 5.8 percent on the company's stock. What will the stock price be in 10 years?

Answer 1

We will use the pricing formula as per the dividend growth model.
Stock price=Last dividend*(1+Growth rate)/(Required rate of return-Growth rate)
Here, we will take dividend that the company just paid as the last dividend. So, last dividend=$1.81
Growth rate=1.01%
Required rate of return=5.8%
Stock price=$1.81*(1+1.01%)/(5.8%-1.01%)=$1.81*(1.0101)/(0.0479)
=$1.828281/0.0479=$38.1687
Here, the stock price changes with years only because of the change in dividend part. We can say that in dividend growth model, stock price increases at the same rate as dividend.
Current price=$38.1687
In 10 years, the stock price will be: $38.1687*(1+1.01%)^10=$38.1687*(1.0101)^10=$42.20375367 or $42.20 (Rounded up to two decimal places)