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

D₁ = D₀ * ( 1 + g)

D₁ = 1.48 * (1 + 7%) = $1.5836

a) when r = 13%

V₀ = $26.39

a) V₈ or value of share in year 8.

For that we first need to calculate D₉ ( dividend in year 9)

D₉ = D₀ * (1 + g)⁹ = $1.48 * (1 + 7%)⁹ = $2.721

V₈ = $45.35

QUESTION 2

g = -4%

D₁ = 5 * (1 - 4%) = $4.8

V₀ = $40