Question

Holtzman Clothiers's stock currently sells for $21.00 a share. It just paid a dividend of $2.50 a share (i.e., D0 = $2.50). The dividend is expected to grow at a constant rate of 6% 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

Answer:

a). The required rate of return=18%

b). The stock price after 1 year is expected to be $24.78

Explanation:

Derive the expression for calculating the required rate of return as follows:

RRR=(EDP/SP)+DGW

where;

RRR=required rate of return

EDP=expected dividend payment

SP=share price

DGW=dividend growth rate

In our case:

RRR=unknown

EDP=$2.50

SP=$21.00

DGW=6%=6/100=0.06

replacing in the original expression;

RRR=(2.5/21)+0.06

RRR=0.18 or 18%

b). The expression for calculating the future value of the stock is as follows:

F.V=C.V×(1+RR)^n

where;

F.V=future value of the stock after a year

C.V=current value of the stock

RR=required rate of return

n=number of years

In our case;

C.V=$21.00 a share

RR=18%=0.18

n=1

replacing;

FV=21×(1+0.18)^1

FV=$24.78

The stock price after 1 year is expected to be $24.78