In mid-December 2001, Jim Vala

In mid-December 2001, Jim Vala has another meeting with Bill Jones. During the meeting, Jones says: “As you know, Jones Group has recently divested DCom. At the time of that transaction, we signed a 20-year lease that gives DCom access to our pipeline property. We have just been informed that, as a result of current market conditions, DCom will default on the lease payments. We need that cash to service the debt that was retained by Jones Group at the time of the divestiture.” Jones continues: “We should consider a new dividend policy to conserve cash. Dividends per share will total $1.85 in 2001. I think we should reduce our dividend by 60 percent and maintain that lower level for 2002 and 2003 to allow us to pay off some debt. In 2004, we will increase our dividend back to $1.85, then grow the dividend at 8 percent annually thereafter.” The required rate of return on Jones Group equity is 11 percent for the foreseeable future.

Calculate, using a dividend discount model (DDM) approach, the expected share price of Jones Group equity on January 1, 2002, given the new dividend policy described by Jones. Show your calculations.

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