Question

1) The Jackson-Timberlake Wardrobe Co. just paid a dividend of $1.48 per share on its stock. The dividends are expected to grow at a constant rate of 7 percent per year indefinitely.

Required: (a) If investors require a 13 percent return on The Jackson-Timberlake Wardrobe Co. stock, what is the current price? (b) What will the price be in 8 years?

2) Antiques R Us is a mature manufacturing firm. The company just paid a $5 dividend, but management expects to reduce the payout by 4 percent per year indefinitely.

Required : If you require an 8 percent return on this stock, what will you pay for a share today?

Answer #1

Based on Constant Growth Dividend Discount Model, Current value of share is present value of expected dividends in future. Mathematically,

**QUESTION 1**

D_{1} = D_{0} * ( 1 + g)

D_{1} = 1.48 * (1 + 7%) = $1.5836

a) when r = 13%

**V _{0} =
$26.39**

a) V_{8} or value of share in year 8.

For that we first need to calculate D_{9} ( dividend in
year 9)

D_{9} = D_{0} * (1 + g)^{9} = $1.48 * (1
+ 7%)^{9} = $2.721

**V _{8} =
$45.35**

**QUESTION 2**

g = -4%

D_{1} = 5 * (1 - 4%) = $4.8

**V _{0} =
$40**

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Please show steps for how to solve in Excel

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