In: Finance
You are analyzing Jillian’s Jewelry (JJ) stock for a possible purchase. JJ just paid a dividend of $1.25 yesterday. You expect the dividend to grow at the rate of 6% per year for the next 3 years; if you buy the stock, you plan to hold it for 3 years and then sell it.
What dividends do you expect for JJ stock over the next 3 years? In other words, calculate D1, D2 and D3. Note that D0 = $1.25. Do not round intermediate calculations. Round your answers to the nearest cent.
D1 = $
D2 = $
D3 = $
JJ stock has a required return of 13%, and so this is the rate you'll use to discount dividends. Find the present value of the dividend stream; that is, calculate the PV of D1, D2, and D3, and then sum these PVs. Do not round intermediate calculations. Round your answer to the nearest cent.
$
JJ stock should trade for $22.54 3 years from now (i.e., you expect = $22.54). Discounted at a 13% rate, what is the present value of this expected future stock price? In other words, calculate the PV of $22.54. Do not round intermediate calculations. Round your answer to the nearest cent.
$
If you plan to buy the stock, hold it for 3 years, and then sell it for $22.54, what is the most you should pay for it? Do not round intermediate calculations. Round your answer to the nearest cent.
$
Use the constant growth model to calculate the present value of this stock. Assume that gL = 6%, and it is constant. Do not round intermediate calculations. Round your answer to the nearest cent.
$
Is the value of this stock dependent on how long you plan to hold it? In other words, if your planned holding period were 2 years or 5 years rather than 3 years, would this affect the value of the stock today, ? Explain your answer.
I. Yes. The value of the stock is dependent upon the holding period. The value calculated in Parts a through d is the value for a 3-year holding period. It is not equal to the value calculated in Part e. Any other holding period would produce a different value of .