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

Business

Bishop

16 April, 13:50

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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Simon Ballard · 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