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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

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?

Summary Introduction

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

Compute next year expected price, ( P1 ).

Given,

Current stock price ( P0 ) is $38 per share.

Growth rate (g) is 5% or 0.05.

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, $38 for P0 and 0.05 for g

P1=$38(1+0.05)=$38×1.05=$39.9

The expected price of the stock for the next year is $39.9.

Compute the required rate of return.

Given,

Current stock price ( P0 ) is $38 per share.

Growth rate (g) is 5% or 0.05.

Current dividend paid ( D0 ) is $2

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