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.)

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.)

What will the stock price be in 20 years? (D

Explanation / Answer

Po= Dividend (1+Growth Rate) / (Expected Rate – Growth Rate)

= 1.7(1+0.05) / (0.15-0.05)

= 1.785 / 0.1

= $17.85

2. Stock price in 3 years

P3 = D3 (1 + g) / (R – g)

P3 = D0 (1 + g)16 / (R – g)

P3 = $1.7 (1+0.05)4 / (0.15 – 0.05)

             P3 = $1.7 (1.05)4 / (0.1)

             P3 = $1.7*1.2155/ 0.1

             P3 = $1.7*12.155

             P3 = $ 20.66

3. Stock price in 20 years

P20 = D20 (1 + g) / (R – g)

        P20 = D0 (1 + g)16 / (R – g)

        P20 = $1.7 (1+0.05)16 / (0.15 – 0.05)

        P20 = $1.7 (1.05)16 / (0.1)

        P20 = $1.7*2.1828 / 0.1

        P20 = $1.7*21.8287

        P20 = $37.19

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