CONSTANT GROWTH VALUATION Holtzman Clothiers\'s stock currently sells for $20 a

Question

CONSTANT GROWTH VALUATION

Holtzman Clothiers's stock currently sells for $20 a share. It just paid a dividend of $3 a share (i.e., D0 = $3). The dividend is expected to grow at a constant rate of 8% a year.

What stock price is expected 1 year from now? Round your answer to two decimal places.
$ ANSWER

What is the required rate of return? Round your answer to two decimal places. Do not round your intermediate calculations.
% ANSWER

CONSTANT GROWTH VALUATION

Holtzman Clothiers's stock currently sells for $20 a share. It just paid a dividend of $3 a share (i.e., D0 = $3). The dividend is expected to grow at a constant rate of 8% a year.

What stock price is expected 1 year from now? Round your answer to two decimal places.
$ ANSWER

What is the required rate of return? Round your answer to two decimal places. Do not round your intermediate calculations.
% ANSWER

Explanation / Answer

Dividend Just Paid = D0 = 3

Dividend Expected after a Year = 3 * (1+dividend growth rate) = 3*( 1 + 0.08) = 3.24

Price of stock after one year = current stock price + expected Dividend after year = 20 + 3.24 = 23.24

rate of return on stock = (price of stock after 1 year - current stock price )/ current stock price

= (23.24-20)/20 = 0.162 = 16.2%

Answer : 1) stock price after 1 year = $23.24

2) rate of return = 16.2%

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