Constant Growth Stock Valuation
You are analyzing Jillian’s Jewelry (JJ) stock for a possible purchase. JJ just paid a dividend of $3.25 yesterday. You expect the dividend to grow at the rate of 5% 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? In other words, calculate D1, D2 and D3. Note that D0 = $3.25. Round your answers to the nearest cent.
b) JJ's stock has a required return of 11%, 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. Round your answer to the nearest cent.
c) JJ stock should trade for $65.84 3 years from now (i.e., you expect P3 = $65.84). Discounted at a 11% rate, what is the present value of this expected future stock price? In other words, calculate the PV of $65.84. Round your answer to the nearest cent.
d) If you plan to buy the stock, hold it for 3 years, and then sell it for $65.84, what is the most you should pay for it? Round your answer to the nearest cent.
e) Use the constant growth model to calculate the present value of this stock. Assume that g = 5%, and it is constant. Round your answer to the nearest cent.