This morning the JacksonTimberlake Wardrobe Co paid an annua

This morning the Jackson–Timberlake Wardrobe Co. paid an annual dividend of $1.65 per share on its stock. The annual dividend is expected to grow at a constant rate of 5 percent per year indefinitely. Investors require an annual return of 12 percent on the company\'s stock.

A.

What is the current stock price? Note the next dividend is paid in one year. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

B.

What will the stock price be in three years? Hint: You need to use the capital gain rate. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

C.

Solution

a.Current price=D1/(Required return-Growth rate)

=$(1.65*1.05)/(0.12-0.05)

=$24.75

We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present value
r=rate of interest
n=time period.

b.P3=$24.75(1+5/100)^3

=$24.75*1.157625

=$28.65(Approx).

c.

P14=$24.75(1+5/100)^14

=$24.75*1.979931599

=$49.00(Approx).