The Jackson–Timberlake Wardrobe Co. just paid a dividend of $1.70 per share on i

Question

The Jackson–Timberlake Wardrobe Co. just paid a dividend of $1.70 per share on its stock. The dividends are expected to grow at a constant rate of 5 percent per year indefinitely. Investors require a return of 15 percent on the company's stock. What is the current stock price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Current price $ 17.85 What will the stock price be in three years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Stock price $ 20.66 What will the stock price be in 20 years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Stock price $ 47.36

Explanation / Answer

As per Gordden theory

Price (P0) = D1 / ( ke – g)

Where D1 = Dividend at the end of the year , Ke = required rate of return, g = growth rate

Answer a)

D1 = D0 x g

P0 = 1.7 * 1.05 / ( .15 – 0.05)

= $17.85

Answer b )

Using the same formula now Dividend at the end of year three

P0 = 1.7 x (1.05)^4 / (0.15 -0.05)

= $20.66

Answer c )

Using the same formula now Dividend at the end of year 20th

P0 = 1.7 x (1.05)^21 / (0.15 -0.05)

= $47.36

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