How to Calculate Expected Stock Price Using Gordon Growth Model
What stock price is expected 1 year from now?
Holtzman Clothiers\'s stock currently sells for $39.00 a share. It just paid a dividend of $3.25 a share. The dividend is expected to grow at a constant rate of 8% a year. What is the stock price expected 1 year from now? Round your answer to the nearest cent.
Calculation of Expected Stock Price
The expected stock price of Holtzman Clothiers one year from now can be calculated using the Gordon growth model. This model assumes that the stock's dividend grows at a constant rate.
Calculation Steps:
1. Calculate the future dividend (D1) using the formula: D1 = D0 * (1 + growth rate)
2. Calculate the stock price using the formula: Stock price = D1 / (required rate of return - growth rate)
Detailed Explanation
In this case, the dividend just paid (D0) is $3.25 and the growth rate is 8%. Calculating D1:
D1 = $3.25 * (1 + 0.08) = $3.51
To calculate the required rate of return and subsequently the expected stock price one year from now, we need more information. The required rate of return is the minimum return an investor expects to receive for investing in the stock. It is influenced by factors such as the risk associated with the stock and the expected return of other investment options.
Please provide the required rate of return to proceed with calculating the expected stock price using the Gordon growth model.