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CONSTANT GROWTH VALUATION Holtzman Clothiers’s stock currently sells for $38.00 a share. It just paid a dividend of $2.00 a share (i.e., D 0 = $2.00). 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?
Fundamentals Of Financial Manageme...
Solutions
Fundamentals Of Financial Manageme...
CONSTANT GROWTH VALUATION Holtzman Clothiers’s stock currently sells for $38.00 a share. It just paid a dividend of $2.00 a share (i.e., D0 = $2.00). 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?
To determine: The expected stock price after 1 year from now and the required rate of return.
Introduction:
Dividends per Share: The periodic rewards that are received by the stockholders for their investment in a company are known as dividends. It is also a measure based on per share. Per share, calculation of dividends is called as the dividends per share.
Explanation of Solution
Compute next year expected price, (
Given,
Current stock price (
Growth rate (g) is 5% or 0.05.
The formula to calculate next expected price is,
Where,
-
- g is the growth rate.
-
Substitute, $38 for
The expected price of the stock for the next year is $39.9.
Compute the required rate of return.
Given,
Current stock price (
Growth rate (g) is 5% or 0.05.
Current dividend paid (
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