Question

Holtzman Clothiers's stock currently sells for $30.00 a share. It just paid a dividend of $1.25 a share (i.e., D0 = $2.0). The dividend is expected to grow at a constant rate of 5% a year. What stock price is expected 1 year from now? What is the required rate of return?

Answer 1

a. $31.5

b. 12%

Step-by-step explanation:

a. We use the formula:

A=P(1+r/100)^n

where

A=future value (which is stock price after 1 year)

P=present value ($30)

r=rate of interest (5%)

n=time period (1 year)

Stock price after one year= 30( 1 + 5/100)^1

= 30(1+ 0.05)

= 30(1.05)

which is equal to =$31.5

b.Required return=(D1/Current price)+Growth rate

=(2*1.05)/30+0.05

which is equal to =0.12 = 12%