Question

Holtzman Clothiers's stock currently sells for $29 a share. It just paid a dividend of $1.5 a share (i.e., D₀ = $1.5). The dividend is expected to grow at a constant rate of 6% a year.

1. What stock price is expected 1 year from now? Round your answer to two decimal places.
   $
2. What is the required rate of return? Round your answer to two decimal places. Do not round your intermediate calculations. %

Earley Corporation issued perpetual preferred stock with a 11% annual dividend. The stock currently yields 8%, and its par value is $100.

1. What is the stock's value? Round your answer to two decimal places.
   $
2. Suppose interest rates rise and pull the preferred stock's yield up to 14%. What is its new market value? Round your answer to two decimal places. %

Answer 1

1:

Part B:

Ke = [ D1 / P0 ] + g

Ke = Required Ret

D1 = Div after 1 year

P0 =Current Price

g = growth Rate

D1 = D0(1+g)

= 1.50 (1+0.06)

= 1.50(1.06)

= 1.59

Ke = [ D1 / P0 ] + g

= [ 1.59 / 29 ] +0.06

= 0.0548 + 0.06

= 0.1148 i.e 11.48%

Part A:

P1 = D2 / [ Ke - g ]

D2 = D1 (1+g)

= 1.59 (1.06)

= 1.6854

P1 = D2 / [ Ke - g ]

= 1.6854 / [ 11.48% - 6% ]

= 1.6854 / 5.48%

= $ 30.76

2:

Part A:

Price = Div / required Ret

= $ 11 / 8%

= $ 137.5

Part B:

= $ 11 / 14%

= $ 78.57