Question

Holtzman Clothiers's stock currently sells for $38 a share. It just paid a dividend of $1.5 a share (i.e., D0 = $1.5). The dividend is expected to grow at a constant rate of 4% a year.

Required:
a. What stock price is expected 1 year from now?
b. What is the required rate of return?

Answer 1

b 6.87%

a 56.53

Step-by-step explanation:

according to the constant dividend growth model

price = d1 / (r - g)

d1 = next dividend to be paid

r = cost of equity

g = growth rate

38 = (1.5 x 1.04) / (r - 0.04)

38 (r - 0.04) = 1.092

r - 0,04 = 0.0287

r = 6.87%

1.5 x (1.04^2) / 6.87 - 4 = 56.53