Holtzman Clothiers's stock currently sells for $27.00 a share. It just paid a dividend of $2.00...

Holtzman Clothiers's stock currently sells for $27.00 a share. It just paid a dividend of $2.00 a share (i.e., D₀ = $2.00). The dividend is expected to grow at a constant rate of 8% a year.

What stock price is expected 1 year from now? Round your answer to the nearest cent.
$

What is the required rate of return? Do not round intermediate calculations. Round your answer to two decimal places.
%

Solutions

Expert Solution

Stock Price today = $27

Dividend last year (D0) = $2

Dividend Growth Rate (g) = 8% per year

As per Gordan Growth Model,

Stock Price = (D0 * (1 + g)) / (Ke - g)

27 = (2 * (1 + 8%)) / (Ke - 8%)

Ke - 8% = 2 * 1.08 / 27

Ke = 0.08 + 0.08

Ke = 0.16 i.e. 16%

Thus, required rate of return is 16% p.a.

Stock Price today = (Dividend in 1 Year + Stock Price in 1 Year) / (1 + Ke)

27 = (2 * (1 + 8%) + Stock Price in 1 Year) / (1 + 16%)

27 * 1.16 = 2.16 + Stock Price in 1 Year

Stock Price in 1 Year = 31.32 - 2.16 = $29.16.

Expected Stock Price 1 Year from now is $29.16.

jeff jeffy answered 1 year ago

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