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# Calculating price of stock

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1.)The Jackson-Timberlake wardrobe Co. just paid a dividend of \$1.95 per share on its stock. The dividends are expected to grow on a constant rate of 6 percent per year indefinitely. If investors require an 11 percent return on the Jackson-Timberlake Wardrobe Co. stock, what is the current price? What will the price be in three years? In 15 years?

2.)The next dividend payment to Hot Wings, Inc. will be \$2.10 per share. The dividends are anticipated to maintain a 5 percent growth rate forever. If the stock currently sells for \$48 per share, what is the required return?

3.)Metroplex Corporation will pay a \$3.04 per share dividend next year. The company pledges to increase its dividends by 3.8 percent per year indefinitely. If you require an 11 percent return on your investment, how much will you pay for the company's stock today?

4.)Apocalyptica Corp. pays a constant \$9.75 dividend on its stock. The company will maintain this dividend for the next 11 years and will then cease paying dividends forever. If the required return on this stock is 10 percent, what is the current share price?

5.)Metallica Bearings Inc is a young start-up company. No dividends will be paid on the stock over the next nine years because the firm needs to plow back its earnings to fuel growth. The company will pay a \$10 per share dividend in 10 years and will increase the dividend by 5 percent per year thereafter. If the required return on this stock is 14 percent, what is the current share price?

6.)Bread, Inc., has an odd dividend policy. The company has just paid a dividend of \$6 per share and has announced that it will increase the dividend by \$4 per share for each of the next 5 years, and then never pay another dividend. If you require an 11 percent return on the company's stock, how much will you pay for a share today?

7.)Marcel Co. is growing quickly. Dividends are expected to grow at a 30 percent rate for the next 3 years, with the growth rate falling off to a constant 6 percent thereafter. If the required return is 13 percent and the company just paid a \$1.80 dividend, what is the current share price?

#### Solution Preview

1.)The Jackson-Timberlake wardrobe Co. just paid a dividend of \$1.95 per share on its stock. The dividends are expected to grow on a constant rate of 6 percent per year indefinitely. If investors require an 11 percent return on the Jackson-Timberlake Wardrobe Co. stock, what is the current price? What will the price be in three years? In 15 years?

Current dividend=Do=\$1.95
Growth rate=g=5%
Expected next dividend D1=D0*(1+g)=1.95*(1+5%)=\$2.0475
Current price=Po=?
Required rate of return=r=11%
Current price=D1/(r-g)=2.0475/(11%-5%)=\$34.125

Expected dividend at the end of 4 years=D4=Do*(1+g)^4=1.95*(1+5%)^4=\$2.370237
Expected price in 3 years=P3=D4/(r-g)=2.370237/(11%-5%)=\$39.50

Expected dividend at the end of 16 years=Do*(1+g)^16=1.95*(1+5%)^16=\$4.256605
Expected price at the end of 15 years=P15=D16/(r-g)=4.256605/(11%-5%)=\$70.94

2.)The next dividend payment to Hot Wings, Inc. will be \$2.10 per share. The dividends are anticipated to maintain a 5 percent growth rate forever. If the stock currently sells for \$48 per share, what is the required return?

Expected next dividend D1=\$2.10
Growth rate=g=5%
Current price=Po=48
Required ...

#### Solution Summary

There are 7 problems. Solution to each problem describes the steps to estimate the price of stock.

\$2.19