Constant Dividend Growth Valuation
You are analyzing Jillian’s Jewelry (JJ) stock for a possible purchase. JJ just paid a dividend of $2.25 yesterday. You expect the dividend to grow at the rate of 8% per year for the next 3 years; if you buy the stock, you plan to hold it for 3 years and then sell it.
What dividends do you expect for JJ stock over the next 3 years? In other words, calculate D1, D2 and D3. Note that D0 = $2.25. Do not round intermediate calculations. Round your answers to the nearest cent.
D1 = $
D2 = $
D3 = $
JJ stock has a required return of 9%, and so this is the rate you'll use to discount dividends. Find the present value of the dividend stream; that is, calculate the PV of D1, D2, and D3, and then sum these PVs. Do not round intermediate calculations. Round your answer to the nearest cent.
$
JJ stock should trade for $306.11 3 years from now (i.e., you expect = $306.11). Discounted at a 9% rate, what is the present value of this expected future stock price? In other words, calculate the PV of $306.11. Do not round intermediate calculations. Round your answer to the nearest cent.
$
If you plan to buy the stock, hold it for 3 years, and then sell it for $306.11, what is the most you should pay for it? Do not round intermediate calculations. Round your answer to the nearest cent.
$
Use the constant growth model to calculate the present value of this stock. Assume that gL = 8%, and it is constant. Do not round intermediate calculations. Round your answer to the nearest cent.
$