Calculate present value of stock using constant growth model

Reference no: EM131797740

Question: You are analyzing Jillian's Jewelry (JJ) stock for a possible purchase. JJ just paid a dividend of $1.50 yesterday. You expect the dividend to grow at a rate of 6% per year for the next 3 years; if you buy the stock, you plan to hold it for 3 years and then sell it.

A. What dividends do you expect for JJ stock over the next 3 years?

B. JJ's stock has a required return of 13% and so this is the rate you'll use to discount dividends. Find the present value of the dividends stream; that is. Calculate the PV of D1, D2, and D3, and then sum these PVs.

C. JJ stock should trade for $27.05 3 years from now (i.e you expect p3=$27.05) discounted at 13% rate, what is the present value of this expected future stock price? In other words, calculate the PV of $27.05

D. If you plan to buy the stock, hold it for 3 years, and then sell it for $27.05, what is the most you should pay for it?

E. Use the constant growth model to calculate the present value of this stock. Assume that g= 6% and is constant.

F. Is the value of this stock dependent on how long you plan to hold it? In other words, if you planned holding period were 2 years or 5 years rather than 3 years, would this affect the value of the stock today, p0? Explain your answer

Reference no: EM131797740

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