Holtzman Clothiers's stock currently sells for $40 a share. It just paid a dividend of $3.5...

Holtzman Clothiers's stock currently sells for $40 a share. It just paid a dividend of $3.5 a share (i.e., D0 = $3.5). The dividend is expected to grow at a constant rate of 4% a year.

a. What stock price is expected 1 year from now?

b. What is the required rate of return?

Expert Solution

P0 = 40 , g = 4%

a : Stock price expected 1 year from now = P1 = P0*(1+ g) = 40*(1+ 0.04) = 41.60

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b : D0 = 3.5 , g = 4% , P0 = 40

D1 = D0*(1+g) = 3.5*(1+0.04) = 3.64

ke = D1/P0 + g = 3.64/40 + 0.04 = 0.131 = 13.10%

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Answers : 41.60 , 13.10% [Thumbs up please]

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jeff jeffy answered 2 years ago

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