Question

The Jackson-Timberlake wardrobe Co. just paid a dividend of $2.10 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 14 percent on company’s stock.

What is the current stock price?

What will the stock price be in three years?

What will the stock price be in 9 years?

Answer 1

	CALCUALTION OF D1,to D10
				Last Dividend	Growth Rate	Dividend of the year
	Dividend after the Year 0= D0			0	0	$                            2.10
	Dividend after the Year 1= D1			$                     2.10	5%	$                            2.21
	Dividend after the Year 2 = D2			$                     2.21	5%	$                            2.32
	Dividend after the Year 3 = D3			$                     2.32	5%	$                            2.43
	Dividend after the Year 4 = D4			$                     2.43	5%	$                            2.55
	Dividend after the Year 5 = D5			$                     2.55	5%	$                            2.68
	Dividend after the Year 6 = D6			$                     2.68	5%	$                            2.81
	Dividend after the Year 7 = D7			$                     2.81	5%	$                            2.95
	Dividend after the Year 8 = D8			$                     2.95	5%	$                            3.10
	Dividend after the Year 9 = D9			$                     3.10	5%	$                            3.26
	Dividend after the Year 10 = D10			$                     3.26	5%	$                            3.42
	Step 2 =CALCULATION OF THE CURRENT VALUE OF THE STOCK
	Formula	P0 = D1 / Ke - g
	Ke = Cost of Equity = Expected return = 14% = 0.14
	g = Growth rate = 5% = 0.05
	P0 = Current Stock Price
	D1 =	2.21
		P0 = D1 / Ke - g
		P0 = 2.21 / 0.14 - 0.05
		P0 = 2.21 / 0.09
		P0 = 24.56
	Step 3 =CALCULATION OF THE VALUE OF THE STOCK AT THE END OF THIRD YEAR
	Formula	P0 = D1 / Ke - g
	Ke = Cost of Equity = Expected return = 14% = 0.14
	g = Growth rate = 5% = 0.05
	P3 = price of the stock at the end of 3RD year
	D4 = Dividend at the end of 4th year = $ 2.55
		P3 = D4 / Ke - g
		P3 = 2.55 / 0.14 - 0.05
		P3 = 2.55 / 0.09
		P3 = $ 28.33
	CALCLATION OF PRESENT VALUE OF THE STOCK
		Year	Dividend	PVF @ 14%	Present Value
		1	$                      2.21	0.87719	$                          1.93
		2	$                      2.32	0.76947	$                          1.78
		3	$                      2.43	0.67497	$                          1.64
	Stock Value P3	3	$                    28.33	0.67497	$                        19.12
			Total		$                        24.48
	Answer = Value of the stock =		$                    24.48
	Step 4 =CALCULATION OF THE VALUE OF THE STOCK AT THE END OF THIRD YEAR
	Formula	P0 = D10 / Ke - g
	Ke = Cost of Equity = Expected return = 14% = 0.14
	g = Growth rate = 5% = 0.05
	P3 = price of the stock at the end of 3RD year
	D4 = Dividend at the end of 4th year = $ 2.55
		P0 = D10 / Ke - g
		P10 = 3.42 / 0.14 - 0.05
		P10 = 3.42 / 0.09
		P10 = 38.01
	CALCLATION OF PRESENT VALUE OF THE STOCK
		Year	Dividend	PVF @ 14%	Present Value
		1	$                      2.21	0.87719	$                          1.93
		2	$                      2.32	0.76947	$                          1.78
		3	$                      2.43	0.67497	$                          1.64
		4	$                      2.55	0.59208	$                          1.51
		5	$                      2.68	0.51937	$                          1.39
		6	$                      2.81	0.45559	$                          1.28
		7	$                      2.95	0.39964	$                          1.18
		8	$                      3.10	0.35056	$                          1.09
		9	$                      3.26	0.30751	$                          1.00
	Stock Value P9	9	$                    28.33	0.30751	$                          8.71
			Total		$                        21.52
	Answer = Value of the stock =		$                    21.52