Final answer:
To determine the expected stock price and required rate of return for Holtzman Clothiers's stock, one would typically use the Dividend Discount Model, which incorporates dividends, growth rate, and required rate of return. For Babble, Inc., an investor would calculate the present value of all expected dividends to determine what they would pay for a share. These calculations require an understanding of the time value of money and concepts like capital gains.
Step-by-step explanation:
The student's question revolves around calculating the expected stock price one year from now, given a current price, dividend, and growth rate, as well as determining the required rate of return on the stock investment. Using the Dividend Discount Model (DDM), we can project the future stock price (P1), anticipating a year from now, by taking the dividend expected next year (D1) and dividing it by the required rate of return (r) minus the dividend growth rate (g). Also, understanding the concept of capital gain, which is the increase in the stock's value from the purchase to the sale point, will help in evaluating the overall expected rate of return from the stock.
To calculate the expected stock price, we can use the formula: P1 = D0 * (1 + g)/(r - g), where D0 is the dividend just paid, g is the constant growth rate of the dividend, and r is the required rate of return. Since we are only given D0 and g in the question, we cannot directly calculate P1 or r without additional information.
Similarly, to answer the hypothetical case of Babble, Inc., an investor would determine the current value of the dividends to be received using the present value of a series of future payments. Since all the profits will be paid out as dividends and we have them for each year, we can calculate the present value of each dividend and sum them up to get the value an investor would be willing to pay for a share of the company, taking into account the time value of money.