Problem 7-3 Constant Growth Valuation Woidtke Manufacturing's stock currently sells for $18 a share. The stock just paid a dividend of $2.50 a share (i.e., D0 = $2.50), and the dividend is expected to grow forever at a constant rate of 5% 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.
First we will calculate estimated required rate of return (k)
We know that,
P0 = D1/ k-g
so,
18 = 2.50*1.05 / k - 5
So k =[ 2.625 / 18] +5%
=19.58%
Now we will compute share price one year from now
P1 = D2 / k - g
=2.625*1.05 / [ 19.58 - 5]
=2.75625/14.58%
=18.90
Problem 7-3 Constant Growth Valuation Woidtke Manufacturing's stock currently sells for $18 a share. The stock...
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