Question

Holtzman Clothiers's stock currently sells for $32.00 a share. It just paid a dividend of $1.75 a share (i.e., D0 = $1.75). The dividend is expected to grow at a constant rate of 3% 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.

?%

Answer 1

We can calculate the value of share today (P₀) as follows :-

P₀ = D1 / Re-g

P₀  = 32

D1 = 1.75*1.03 =1.8025

g = 0.03

Re = required rate of return

we can substitute the given values in the equation to get .

P₀ = D1 / Re-g

32 = 1.8025 / Re-0.03

Re-0.03 = 1.8025 / 32

Re-0.03 = 1.8025 / 32

Re-0.03 = 0.056328

Re = 0.056328+0.03

Re = 0.086328

Using this Re = 0.086328, We can calculate the value of share today (P₁) as follows :-

P₁= D2 / Re-g

P₁  = ?

D2 = 1.8025 * 1.03 = 1.8565

g = 0.03

Re = 0.086328

P₁= D2 / Re-g

P₁= 1.8565/ 0.086328- 0.03

P₁= 1.8565 / 0.056328

P₁= 32.9587

P₁= 33

stock price expected 1 year from now = 33

Re = required rate of return = 0.086328 =8.6328%

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