Jackson Company
The Jackson Company has just paid a dividend of R3.00 per share on its ordinary shares, and it expects this dividend to grow by 10 percent per year, indefinitely.The firm has a beta of 1.50; the risk-free rate is 10 percent; and the expected return on the market is 14 percent.The firm's investment bankers believe that new issues of ordinary shares would have a flotation cost equal to 5 percent of the current market price.
-Refer to Jackson Company.How much should an investor be willing to pay for this share today?

Question

Quizplus · Accepted Answer

To calculate the current price of the stock, we can use the dividend discount model:

P = D / (r - g)

Where:
P = the current price of the stock
D = the most recent dividend
r = the required rate of return
g = the expected growth rate of dividends

Plugging in the values we have:

D = R3.00 
g = 10% 
r = 10% + 1.5(14% - 10%) = 19%

P = R3.00 / (19% - 10%) = R55.00

Therefore, an investor should be willing to pay R55.00 for this share today.

Jackson Company The Jackson Company Has Just Paid a Dividend of R3.00