Question

Holtzman Clothiers's stock currently sells for $31.00 a share. It just paid a dividend of $1.00 a share (i.e., D0 = $1.00). The dividend is expected to grow at a constant rate of 4% a year. What stock price is expected 1 year from now? Round your answer to two decimal places. $ 32.24 What is the required rate of return? Do not round intermediate calculations. Round your answer to two decimal places. 31 %

Answer 1

Answer:

1. Year 1 expected value = $32.24

2. Required rate of return = 7.35%

Explanation:

1. For computing the stock price which is expected 1 year from now is shown below:

= Current Price × (1+rate)^number of years

= $31 × (1+0.04)^1

= $31 × 1.04

= $32.24

Hence, the expected 1 year value of stock price is $32.24

2. The required rate of return is computed by using an formula which is shown below:

= (Current Year dividend ÷ Current stock price)+ growth rate

where,

current year dividend is = D1

And, D1 = DO × (1+g)

where,

DO = previous dividend share

g = growth rate

So, $1 × (1+0.04)

= $1 × 1.04

= $1.04

Now apply these values to the above formula

So, required rate of return is equals to

= ($1.04 ÷ $31) + 0.04

= 7.35%

Hence, the required rate of return is 7.35%