Question

The JacksonâTimberlake Wardrobe Co. just paid a dividend of $1.75 per share on its stock. The dividends are expected to grow at a constant rate of 4 percent per year indefinitely. Investors require a return of 11 percent on the company's stock.
What is the current stock price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
What will the stock price be in 18 years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Stock price $

Answer 1

Answer:

$26 and $52.67

Explanation:

The computation is shown below:

In this question,  we use the constant growth model which is as follows

The Current Stock price is

= Expected dividend ÷ (Required rate of return - growth rate)

= $1.75 × 1.04 ÷ (11% - 4%)

= $26

Now the stock price after 18 years is

= Stock price × (1 + growth rate)^number of years

= $26 × (1 + 0.04) ^18

= $52.67

We simply applied the above formulas