Question

# 1) The Jackson-Timberlake Wardrobe Co. just paid a dividend of \$1.48 per share on its stock....

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?

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

#### Earn Coins

Coins can be redeemed for fabulous gifts.