Question

CONSTANT GROWTH VALUATION

Holtzman Clothiers's stock currently sells for $21 a share. It just paid a dividend of $3.75 a share (i.e., D0= $3.75). 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

Solution:
	Stock price expected in 1 year (P1)	$22.05
	Required rate of return(Ks)	23.75%
Working Notes:
	Stock price expected in 1 year (P1) = P0 x (1+g)
	P1= $21 x (1+0.05)
	P1= $22.05
	Using Gordon growth model : P0 = D1 / (Ks - g), where D1 = D0(1+g)
	Required rate of return (Ks)=??
	Po=current share price = $21 per share
	g= growth rate= 5 %
	D0= Current Dividend=$3.75 per share
	P0 = D0(1+g)/(Ks -g)
	Ks= D0(1+g)/P0 + g
	Ks= 3.75(1+0.05)/21 + 0.05
	Ks= 0.1875 + 0.05
	Ks= 0.2375
	Ks= 23.75%
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