The Jackson-Timberlake Wardrobe Co. just paid a dividend of $1.30 per share on its stock. The...

The Jackson-Timberlake Wardrobe Co. just paid a dividend of $1.30 per share on its stock. The dividends are expected to grow at a constant rate of 5 percent per year indefinitely.

a. If investors require a return of 12 percent on the company's stock, what is the current price?

b. What will the price be in 6 years?

Solutions

Expert Solution

Information provided:

Current dividend = $1.30

Growth rate of dividends= 5%

Required rate of return= 12%

The question is solved using the dividend discount model.

a.Price of the stock today=D1/(r-g)

where:

D1=next dividend payment

r=interest rate

g=firm’s expected growth rate

Current price of stock= $1.30*(1+0.05)/ 0.12 – 0.05

= $1.3650/ 0.07

= $19.50.

Therefore, the current price is $19.50.

b.Price of stock in 6 years: $19.50*(1+0.05)^6 = $26.13.

Therefore, the stock price in 6 years is $26.13.

In case of any query, kindly comment on the solution.

jeff jeffy answered 10 months ago

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