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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

CONSTANT GROWTH VALUATION Harmon Clothiers’ stock currently sells for $20.00 a share. It just paid a dividend of $1.00 a share (that is, D0 = $1.00). The dividend is expected to grow at a constant rate of 6% a year. What stock price is expected 1 year from now? What is the required rate of return?

Summary Introduction

To determine: The expected stock price 1 year from now and the required rate of return.

Dividends per Share:

The periodic rewards received by the stockholders for their investment in a company are known as dividends. It is also measured on the basis of per share. Per share calculation of dividends is called dividends per share.

Explanation

Compute next year expected price, ( P1).

Given,

Current stock price ( P0) is $20 per share.

Growth rate (g) is 6%or 0.06.

The formula to calculate next expected price is,

P1=P0(1+g)

Where,

  • P0 is the current  stock price.
  • g is the growth rate.
  • P1 is the next expected price.

Substitute $20 for P0 and 0.06 for g.

P1=$20(1+0.06)=$20×1.06=$21.2

The expected price of the stock next year is $21.2.

Compute the required rate of return.

Given,

Current stock price ( P0) is $20 per share.

Growth rate (g) is 6% or 0.06.

Current dividend paid ( D0) is $1

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