The Jackson–Timberlake Wardrobe Co. just paid a dividend of $1.60 per share on its stock. The dividends are expected to grow at a constant rate of 6 percent per year indefinitely. Investors require a return of 10 percent on the company's stock. What is the current stock price? What will the stock price be in three years? What will the stock price be in 12 years?

(1)$42.4 (2)$50.50 (3)$85.32

Explanation:

Solution

Given that:

(1) The current stock price is computed below:

Stock price, P0 = D1÷(r-g)

Where

D₁ = the next dividend expected

r = the return required

g = he growth rate

Thus

= $1.60×(1+6%)/(10%-6%)

$42.4

(2) The formula for the stock price in three years  is given below:

Stock price, P3= D4÷(r-g)

Here

D₁ = the next dividend expected

r = the return required

g = he growth rate

= $1.60×[(1+6%)^4]/(10%-6%)

= $50.50

(3) Now we determine the price of the stock in 12 years

P12 = D13÷(r-g)

Here

D₁ = the next dividend expected

r = the return required

g = the growth rate

= $1.60×[(1+6%)^13]/(10%-6%)

= $85.32

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