Constant Dividend Growth Valuation You are analyzing Jillian's Jewelry (JJ) stock for a possible purchase. J just paid a dividend of $3.00 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 sedl it. a. What dividends do you expect for 1] stock cver the next 3 years? In ather words, calculate D1, D2 and D3. Note that D0=$3.00. Da net raund intermediate cakulations. Raund your answers to the nearest cent. D1=$D2=$D3=$ b. J stock has a required return of 10%, and so this is the rate you'll use to discount dividends, Find the present walue of the dividend stream; that is, calculate the FV of D1, D2, and D9, and then surn these PVs. Do not raund interrnediate calculatians. Raund your answer to the nearest cent. $ c. JJ stock should trade for $72.933 years from now (i.e., you expect Ps=572.937. Discounted at a 10\%, rate, what is the present value of this expected future stock price? In other words, calculate the PV of $72.93. Do not round intermediate calculations. Round your answer to the nearest cent. $ d. If you plan to buy the stack, hold it for 3 years, and then sell it far 572.93, what is the mast yau shauld pay for it? Do not raund interrnediate calculatians. Raund your answer to the nearest cent. e. Use the corrstant grawth madel to calculate the present value of this stock. Assume that 9L=5%, and it is constant. Do not round interrnediate calculatians. Round your answer to the nearest cent. f. Is the value of this stede deperident on how long you plan to hold it? In other wards, if your planned holding period were 2 years or 5 years rather tharl 3 years, would this affect the value of the stock today, P0 ? Explain your answer. I. No. The value of the stock is not dependent upon the holding periad. The value calculated in Parts a through d is the value for a 3 -year holding period. It is equal to the value calculated in Part e. Any other holding pericd would produce the same value of P0. II. Yes. The value of the stock is dependent upon the holding period. The value calculated in Parts a through d is the value for a 3 -year halding periad. It is not equal to the value caloulated in Part e. Any other holding peried would produce a different value of Pil. III. Yes. The value of the stock is dependent upon the holding period due to the tact that the value is determined as the present value of all future expected dividends. IV. No. The value of the stock is not dependent upon the holding period unless the growth rate remains constant for the foreseeable future. V. Yes. The value of the stock is dependent upon the holding period as long as the growth rate remains constant for the foresecable future
