Question

Harrison Clothiers’ stock currently sells for $20.00 a share. It just paid a dividend of $1.00 a share (that is, D0 = $1.00). The dividend is expected to grow at a constant rate of 6% a year. What stock price is expected 1 year from now? What is the required rate of return?

Answer 1

$1.06; 11.3%

Step-by-step explanation:

Current selling price of stock, P = $20

Dividend paid a share, D0 = $1

Dividend growth rate = 6%

Dividend growth rate = (D1 ÷ D0) - 1

6% = (D1 ÷ 1) - 1

0.06 = (D1 ÷ 1) - 1

D1 = 1.06

Expected dividend yield = D1 ÷ P

= 1.06 ÷ 20

= 5.3%

Required rate of return = Expected growth + Expected dividend yield

= 6% + 5.3%

= 11.3%