Constant Growth Valuation Woidtke Manufacturing\'s stock currently sells for $32
ID: 2613727 • Letter: C
Question
Constant Growth Valuation
Woidtke Manufacturing's stock currently sells for $32 a share. The stock just paid a dividend of $2.25 a share (i.e., D0 = $2.25), and the dividend is expected to grow forever at a constant rate of 4% a year.
What stock price is expected 1 year from now? Round your answer to the nearest cent.
$
What is the estimated required rate of return on Woidtke's stock? Round the answer to three decimal places.
%
Constant Growth Valuation
Woidtke Manufacturing's stock currently sells for $32 a share. The stock just paid a dividend of $2.25 a share (i.e., D0 = $2.25), and the dividend is expected to grow forever at a constant rate of 4% a year.
What stock price is expected 1 year from now? Round your answer to the nearest cent.
$
What is the estimated required rate of return on Woidtke's stock? Round the answer to three decimal places.
%
Explanation / Answer
cost of equity =[ D0(1+g) /Current price] +g
= [2.25(1+.04) /32] + .04
=[2.34 / 32 ] +.04
= .073125 +.04
= .11313 or 11.313%
1)price in one year = D1(1+g) /(cost - g)
= 2.34 (1+.04) /(.11313 -.04)
= 2.4336 / .07313
=$ 33.28 per share.
*D1 =2.25(1+.04)= 2.34
2)required rate of return = 11.313%