Question

S08-01 Stock Values (L01) The Jackson-Timberlake Wardrobe Co.just paid a dividend of $2.15 per share on its stock. The dividends are expected to grow at a constant rate of 4 percent per year indefinitely. Investors require a return of 10.5 percent on the company's stock. a. What is the current stock price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What will the stock price be in 3 years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. What will the stock price be in 15 years? (Do not round Intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) a. Current price b. Stock price in 3 years c. Stock price in 15 years

Answer 1

Answer :

(a) Current stock price = D₁ / Required return - Growth rate

= 2.236 / 0.105 - 0.04

= $ 34.40

D₁ = D₀ (1+g ) = 2.15 ( 1.04 ) = 2.236

(b) Stock price in  3 years = Current price ( 1 + g ) ⁿ

= $ 34.40 (1 + 0.04 ) ³

= $ 38.70 ( Apprx)

(c) Stock price in 15 years

= Current price ( 1 + g

= $ 34.40 (1 + 0.04 ) 15

= $ 61.95