Holtzman Clothierss stock currently sells for 34 a share It

Holtzman Clothiers\'s stock currently sells for $34 a share. It just paid a dividend of $1 a share (i.e., D₀ = $1). The dividend is expected to grow at a constant rate of 10% 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? Round your answer to two decimal places. Do not round your intermediate calculations.
%

Solution

Current Stock price = $34

Current Dividend = $1.00

Dividend Growth rate = 10%

a.

Expected dividend in year 1 = $1.00 × (1 + 10%)

= $1.10

Expected dividend in year 1 will be $1.10.

b.

Required rate of return = (Expected dividend / Current Stock price) + Growth rate

= ($1.10 / $34) + 10%

= 3.24% + 10%

= 13.24%

Required rate of return on comapny stock is 13.24%.