Question

J.C. Penney Company is expected to pay a dividend in year 1 of $1.65, a dividend in year 2 of $1.97, and a dividend in year 3 of $2.54. After year 3, dividends are expected to grow at the rate of 8% per year. An appropriate required return for the stock is 11%. The stock should be worth _______ today.

Answer 1

Present value of stock=Dividend in year 1/(1+required return)^1+Dividend in year 2/(1+required return)^2+Dividend in year 3/(1+required return)^3+Terminal value/(1+required return)^3

Terminal value=(Dividend in year 3)*(1+growth rate)/(Required return - growth rate)
Given that the required return is 11% and growth rate is 8%.
Terminal value=2.54*(1+8%)/(11%-8%)
=(2.54*1.08)/(0.03)
=2.7432/0.03
=91.44

Given that, dividend in year 1=$1.65, in year 2 dividend=$1.97, dividend in year 3 =$2.54

Present value=1.65/(1+11%)^1+1.97/(1+11%)^2+2.54/(1+11%)^3+91.44/(1+11%)^3
=1.65/(1.11)^1+1.97/(1.11)^2+2.54/(1.11)^3+91.44/(1.11)^3
=1.65/1.11+1.97/1.2321+2.54/1.367631+91.44/1.367631
=1.486486486+1.598896193+1.857226109+66.86013991

=71.8027487 or $71.80 (Rounded to two decimal places)