Question

Holtzman Clothiers's stock currently sells for $39 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 9% a year.

Answer 1

The Stock price is expected 1 year from now

The Stock price is expected 1 year from now = Current Share Price x (1 + growth Rate)

= $39.00 per share x (1 + 0.09)

= $39.00 x 1.09

= $42.51 per share

Required rate of return on the stock

Using Constant Growth Dividend Valuation Model, the Required Rate of Return is calculated as follows

Required Rate of Return = [D0(1 + g) / P0] + g

Here, we’ve Last Year Dividend (D0) = $3.50 per share

Current Share Price (P0) = $39.00 per share

Dividend Growth Rate (g) = 9.00% per year

Therefore, the Required Rate of Return = [D0(1 + g) / P0] + g

= [$3.50(1 + 0.09) / $39.00] + 0.09

= [$3.8150 / $39.00] + 0.09

= 0.0978 + 0.09

= 0.1878 or

= 18.78%

“Hence, the Required Rate of Return on the stock would be 18.78%”