Holtzman Clothiers's stock currently sells for $26

Finance Nov 13, 2020

Holtzman Clothiers's stock currently sells for $26.00 a share. It just paid a dividend of $2.50 a share (i.e., Do = $2.50). The dividend is expected to grow at a constant rate of 3% 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. %

Expert Solution

P0 = current stock price = $26

g = growth rate = 3%

D0 = Current Dividend = $2.50

Stock price in one year = Current stock price * (1+ growth rate)

= $26 * (1+3%)

= $26.78

Therefore, stock price expected 1 year from now is $26.78

Required return = [D0 * (1+g) / P0] + g

= [$2.50 * (1+3%) / $26] + 3%

= 0.0990384615 + 0.03

= 0.1290384615

= 12.90%

Therefore, required Rate of Return is 12.90%

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