Problem 8-19 Constant Growth Stock Valuation

You are analyzing Jillians Jewelry (JJ) stock for a possible purchase. JJ just paid a dividend of $1.00 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 sell it.

1. What dividends do you expect for JJ stock over the next 3 years? In other words, calculate D₁, D₂ and D₃. Note that D₀ = $1.00. Round your answers to the nearest cent.
   1. D₁ = $
   2. D₂ = $
   3. D₃ = $
2. 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. $
3. JJ stock should trade for $20.26 3 years from now (i.e., you expect = $20.26). Discounted at a 11% rate, what is the present value of this expected future stock price? In other words, calculate the PV of $20.26. Round your answer to the nearest cent. $
4. If you plan to buy the stock, hold it for 3 years, and then sell it for $20.26, what is the most you should pay for it? Round your answer to the nearest cent. $
5. 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. $