Harrison Clothiers’ stock currently sells for $29 a share

Answer;

Part 1) Required Rate = 9.66%

Part 2) P1 = $30.74

Explanation;

Part 1)

Required Rate of return = ( D1 / P0 ) + G

here,

D1 = DIvidend @0th year + growth i.e. $1 + 6% = $1.06

P0 = Current market Price i.e. $29

G = Growth i.e. 6% per year

So,

Required Rate of return = $1.06 / $29 + 6%

Required Rate of return = 3.6552% + 6%

Required Rate of return ( Ke)  = 9.6552% or 9.66%

Part 2)

Expected price 1 year from now = D2 /(ke - G)

here,

Dividend in year 2 = D0 x (1+Growth)^2 or D1 + growth rate i.e. $1 x (1.06)^2 = $1.1236

Required rate (Ke) = 9.6552%

Growth =6%

So,

Present value @ year 1 = $1.1236 / ( 9.6552% - 6%)

P1 = $1.1236 /  3.6552%

P1 = $30.7398 or $30.74