The Jackson-Timberlake Wardrobe Co. just paid a dividend of $2.15 per share on its stock. The dividends are expected to grow at a constant rate of 4 percent per year indefinitely. If investors require a return of 10.5 percent on the company's stock, what is the current price? What will the price be in three years? In 15 years?

Question

Kaley Lester

Business

20 August, 07:08

The Jackson-Timberlake Wardrobe Co. just paid a dividend of $2.15 per share on its stock. The dividends are expected to grow at a constant rate of 4 percent per year indefinitely. If investors require a return of 10.5 percent on the company's stock, what is the current price? What will the price be in three years? In 15 years?

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Answers (1)

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Brie · Answer 1

The current price is $34.40

The price be in three years is $38.70

The price in 15 years is $61.95

Explanation:

In this question, we apply the Gordon model which is shown below:

= Next year dividend : (Required rate of return - growth rate)

where,

Current year dividend

For one year

= $2.15 * (1 + 4%)

= $2.15 * 1.04

= $2.236

The other items rate would remain the same

Now put these values to the above formula

So, the value would equal to

= 2.236 : (10.5% - 4%)

= $34.40

The price is three years would be

= $34.40 * (1.04) ^ 3 years

= $34.40 * 1.124864

= $38.70

The price is 15th years would be

= $34.40 * (1.04) ^ 15 years

= $34.40 * 1.8009435055

= $61.95