Expected Stock Price and Required Rate of Return Calculation
What stock price is expected 1 year from now? Round your answer to the nearest cent.
$
What is the required rate of return? Do not round intermediate calculations. Round your answer to two decimal places.
%
Answer:
The required rate of return is approximately 19%.
The stock price expected 1 year from now can be calculated using the dividend growth model. The formula for the dividend growth model is:
P1 = D1 / (r - g)
where P1 is the expected stock price 1 year from now, D1 is the expected dividend 1 year from now, r is the required rate of return, and g is the growth rate of the dividend.
In this case, the dividend just paid (D0) is $3.25, and the growth rate (g) is 6% per year. To calculate the expected stock price (P1), we need to find the required rate of return (r).
To find the required rate of return (r), we can rearrange the formula and solve for r:
r = (D1 / P0) + g
where P0 is the current stock price, which is $25.00 in this case.
Let's calculate the required rate of return (r) first:
r = ($3.25 / $25.00) + 0.06
r ≈ 0.13 + 0.06
r ≈ 0.19
So, the required rate of return is approximately 19%.
Now, we can calculate the expected stock price 1 year from now (P1):
P1 = $3.25 / (0.19 - 0.06)
P1 ≈ $3.25 / 0.13
P1 ≈ $25.00
Therefore, the expected stock price 1 year from now is approximately $25.00.
When it comes to forecasting the stock price and required rate of return, the dividend growth model is a useful tool for investors. By calculating the expected stock price and the required rate of return, investors can make informed decisions about buying or selling a stock.
The dividend growth model takes into account the expected dividend, the growth rate of the dividend, and the required rate of return to estimate the future stock price. In the case of Holtzman Clothiers, with a current stock price of $25.00 and a dividend of $3.25, the expected stock price 1 year from now is approximately $25.00, with a required rate of return of 19%.
Understanding these calculations can help investors assess the potential returns and risks associated with investing in a particular stock. It's essential to consider factors such as dividend growth, current stock price, and required rate of return when making investment decisions.