Question

In: Finance

The Jackson–Timberlake Wardrobe Co. just paid a dividend of $2.00 per share on its stock. The...

The Jackson–Timberlake Wardrobe Co. just paid a dividend of $2.00 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 12 percent on the company's stock.

A. What is the current stock price?

B. What will the stock price be in three years?

C. What will the stock price be in 12 years?

Solutions

Expert Solution

A )   Market Price=Expected Dividend / (Ke-g)

                     =D0(1+g) / (Ke-g)

                     =2(1+.04) / (12%-4%)

                    =2.08 / 8% = $ 26

      B)   Market Price after 3 Years =  D0(1+g)4  

                                                        = 2 (1.04)4/ 8%

                                                       = $ 29.25

      C)   Market Price after 12 Years =  D0(1+g)13  

                                                        = 2 (1.04)13/ 8%

                                                       = $ 40.02


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