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Firefox File Edit View History Bookmarks Tools Window Help Ch8 Quiz O ezto.mheducation.com/hm.tpx Econnect Corporate Financial Stra FINANCE h8 Quiz Question 9 (of 15) 9. value: 3.00 points P8-1 Stock Values [LO1] The Jackson-Timberlake Wardrobe Co. just paid a dividend of $1.44 per share on its stock. The dividends are expected to grow at a constant rate of 6 percent per year indefinitely Required: (a) If investors require a 11 percent return on The Jackson-Timberlake Wardrobe Co. stock, what is the current price? $30.53 (b) What will the price be in 17 years? $77.55 References Worksheet 6

Solution

a. Computation of Current Price

Current Price using Gordon Formula = Dividend Paid * (1 + Growth Rate) / (Required return - Growth Rate)

Current Price = $1.44 * (1 + 0.06) / (11% - 6%)

Current Price = $1.526 / (5%) = $30.53

b. Computation of price in 17 years

Price in 17 Years = Current Price * ( 1 + Growth Rate)^17

Price in 17 Years = $30.53 * ( 1 + 0.06)^17

Price in 17 Years = $30.53 * 2.6928 = $82.21