Question

Woidtke Manufacturing’s stock currently sells for $22 a share. The stock just paid a dividend of $1.20 a share (i.e., D0 5 $1.20), and the dividend is expected to grow forever at a constant rate of 10% a year. What stock price is expected 1 year from now? What is the estimated required rate of return on Woidtke’s stock?

Answer 1

Expected 1 year = $24.20

Required return = 16%

Step-by-step explanation:

The computation of expected of 1 year and rate of return is shown below:

A = P × (1 + r ÷ 100)^n

which represents

A = future value

P = present value

r = rate of interest

n = time period.

Price after year

1 = $22 × (1.1)

=$24.20

2.Required return = (Dividend ÷ Current price) + Growth rate

= (1.20 × 1.1) ÷ 22 + 0.1

= 16%