You are analyzing Jillian's Jewlery (JJ) stock for a possible purchase. JJ just paid a dividend of $1.50 yesterday. You expect the dividend to grow at the 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? In other words, calculate D1, D2, and D3. Note that D0 = $1.50.
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 dividend stream; that is, calculate the PV of D1, D2, and D3, and then sum these PVs.
c. JJ stock should trade for $27.053 years from now (i.e., you expect 3 = $27.05). Discounted at a 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 your planned holding period were 2 years or 5 years rather than 3 years, would this affect the value of the stock today, 0? Explain your answer.