Question

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. What is the current stock price? What will the stock price be in three years? What will the stock price be in 12 years?

Answer 1

a.
	Current Stock Price		$    26.00
	Working:
	As per dividend discount model,
	Current Stock Price			=	D0*(1+g)/(Ke-g)			Where,
				=	2.00*(1+0.04)/(0.12-0.04)			D0	$       2.00
				=	$    26.00			g	4%
								Ke	12%
b.
	Stock Price be in 3 years				$    29.25
	Working:
	Dividend be in three years			=	D0*(1+g)^3
				=	2.00*(1+0.04)^3
				=	$       2.25
	Stock Price be in 3 years			=	D3*(1+g)/(Ke-g)			Where,
				=	2.25*(1+0.04)/(0.12-0.04)			D3	$       2.25
				=	29.25			g	4%
								Ke	12%
c.
	Stock Price be in 12 years				$    41.60
	Working:
	Dividend be in 12 years			=	D0*(1+g)^12
				=	2.00*(1+0.04)^12
				=	3.202064
	Stock Price be in 12 years			=	D12*(1+g)/(Ke-g)			Where,
				=	3.20*(1+0.04)/(0.12-0.04)			D12	$       3.20
				=	$    41.60			g	4%
								Ke	12%