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28 February, 21:58

The Jackson-Timberlake Wardrobe Co. just paid a dividend of $1.70 per share on its stock. The dividends are expected to grow at a constant rate of 5 percent per year indefinitely. Investors require a return of 15 percent on the company's stock. a. What is the current stock price?

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  1. 28 February, 23:39
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    Current stock price is $17.00

    Explanation:

    The formula for computing the current stock price is given as current dividend/expected rate of return-dividend growth rate)

    current dividend is $1.70

    investor's expected rate of return is 15%

    dividend growth rate is 5%

    current stock price=$1.70 / (15%-5%)

    =$17.00

    The current stock price is valued at $17 taking into consideration the dividends earning capacity of the stock as a rational investor pays a stock based on the potential dividends the stock is capable of paying in future.
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