Question

Holtaman Clothiers's stock currently selis for $32.00 a share. It just paid a dividend of $3.00 a share (I.e., Do = $3.00). The dividend is expected to grow at a constant rate of 6% a year. What stock price is expected 1 year from now? Round your answer to two decimal places. What is the required rate of return? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

Holtzman Clothiers's stock is expected to be priced at $33.92 one year from now, based on the dividend growth model with a 6% growth rate. The required rate of return, combining the dividend yield and growth rate, is 15.375%.

Step-by-step explanation:

The expected stock price one year from now for Holtzman Clothiers, given a dividend of $3.00 and a constant growth rate of 6%, can be calculated using the dividend growth model. To find this, we take the dividend one year from now, which is Do (1+growth rate), and divide it by the required rate of return minus the growth rate. The future dividend, D1, is $3.00(1+0.06) = $3.18. If the stock price is expected to grow at the same rate as the dividend, the expected stock price one year from now will be $32.00 multiplied by the growth factor, 1.06, which gives us $33.92.

As for the required rate of return, it is the sum of the dividend yield and the dividend growth rate. Given the current dividend and stock price, the dividend yield is $3.00 divided by $32.00, which equals 9.375%. Adding the constant growth rate of 6% to this figure gives us a required rate of return of 15.375%.