Question

The EPS and dividend of Johnson & Johnson (JNJ) was $2 and $0.9 respectively last year....

The EPS and dividend of Johnson & Johnson (JNJ) was $2 and $0.9 respectively last year. With a required return of 9%, how much will the stock price of JNJ change if the growth rate increases from 7% to 7.7058%?

Using calculator or formula  

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Answer #1

Ans $ 26.75

P0 = Price of Share
D1 = Current Dividend
Ke = Cost of Equity
g = growth rate
At growth rate of 7%
P0 = D1 / (Ke - g)
P0 = 0.9630 / (9%- 7%)
P0 = 48.15
D1 = D0* (1 + g)
D1 = 0.9* (1 + 7.00%)
D1 = 0.9630
At growth rate of 7.7058%
P0 = D1 / (Ke - g)
P0 = 0.96935220 / (9%- 7.7058%)
P0 = 74.90
D1 = D0* (1 + g)
D1 = 0.9* (1 + 7.7058%)
D1 = 0.96935220
Difference in price= 74.90 - 48.15
26.75
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