Woidtke Manufacturing's stock currently sells for $22 a share. The stock just paid a dividend of $1.20 a share (i. e., D0 5 $1.20), and the dividend is expected to grow forever at a constant rate of 10% a year. What stock price is expected 1 year from now? What is the estimated required rate of return on Woidtke's stock?

Question

Cheyenne Pennington

Business

12 September, 00:13

Woidtke Manufacturing's stock currently sells for $22 a share. The stock just paid a dividend of $1.20 a share (i. e., D0 5 $1.20), and the dividend is expected to grow forever at a constant rate of 10% a year. What stock price is expected 1 year from now? What is the estimated required rate of return on Woidtke's stock?

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Answers (1)

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Alexzander Frederick · Answer 1

Expected 1 year = $24.20

Required return = 16%

Explanation:

The computation of expected of 1 year and rate of return is shown below:

A = P * (1 + r : 100) ^n

which represents

A = future value

P = present value

r = rate of interest

n = time period.

Price after year

1 = $22 * (1.1)

=$24.20

2. Required return = (Dividend : Current price) + Growth rate

= (1.20 * 1.1) : 22 + 0.1

= 16%