Harrison Clothiers' stock currently sells for $34 a share

Finance Dec 21, 2020

Harrison Clothiers' stock currently sells for $34 a share. It just paid a dividend of $1 a share. The dividend is expected to grow at a constant rate of 6% a year. What is the required rate of return? What stock price is expected 1 year from now?

Expert Solution

a) Next year dividend = 1 (1 + 0.06) = 1.06

Required rate = (Next year dividend / price) + growth rate

Required rate = (1.06 / 34) + 0.06

Required rate = 0.0912 or 9.12%

b) Expected stock price in 1 year = Current stock price (1 + growth rate)

Expected stock price in 1 year = 34 (1 + 0.06)

Expected stock price in 1 year = $36.04

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