Question

CONSTANT GROWTH VALUATION

Holtzman Clothiers's stock currently sells for $20 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 5% a year.

What stock price is expected 1 year from now? Round your answer to two decimal places.

$

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

%

Answer 1

D0 = $3.50
Growth Rate, g = 5%
Current Price, P0 = $20

D1 = D0 * (1 + g)
D1 = $3.50 * (1 + 0.05)
D1 = $3.675

D2 = D1 * (1 + g)
D2 = $3.675 * (1 + 0.05)
D2 = $3.8588

Required Rate of Return, r = D1 / P0 + g
Required Rate of Return, r = $3.675 / $20 + 0.05
Required Rate of Return, r = 0.2338
Required Rate of Return, r = 23.38%

Expected Price in 1 year, P1= D2 / (r - g)
Expected Price in 1 year, P1= $3.8588 / (0.2338 - 0.05)
Expected Price in 1 year, P1= $20.99