Final answer:
The student's question was about the calculation of the future stock price and required rate of return using the Dividend Discount Model, resulting in a next year's expected stock price of $29.43 and a required rate of return of 17.07%.
Step-by-step explanation:
The student's question relates to the calculation of the theoretical future stock price (P hat 1) and the required rate of return (rs) using the Dividend Discount Model (DDM). In the first part of the calculation, we use the given figures to determine the next year's expected stock price.
Starting with the current stock price (P0) which is $27, the dividend (D0) which is $2, and the growth rate (g) which is 9%, the formula P hat 1 is computed as follows:
P hat 1 = P0 (1 + g) = $27 (1 + 0.09) = $29.43
For the calculation of the required rate of return (rs), we add the growth rate to the dividend yield, which is the dividend of the next year (D1), divided by the current stock price. Formula is:
rs = D1 / P0 + g = ($2 x 1.09) / $27 + 0.09 = 17.07%
The calculations for P hat 1 and rs are consistent with the typical approach in this domain and provide the student with the necessary figures for their finance related question.