Woidtke Manufacturing\'s stock currently sells for $33 a share. The stock just p

Question

Woidtke Manufacturing's stock currently sells for $33 a share. The stock just paid a dividend of $1.25 a share (i.e., D0 = $1.25), and the dividend is expected to grow forever at a constant rate of 6% 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.

Nick's Enchiladas Incorporated has preferred stock outstanding that pays a dividend of $4 at the end of each year. The preferred sells for $45 a share. What is the stock's required rate of return (assume the market is in equilibrium with the required return equal to the expected return)? Round the answer to two decimal places.

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Part A:

Stock Price 1 Year from Now = Current Price*(1+Growth Rate) = 33*(1+6%) = $34.98 or $34.9

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Required Return = D1/Current Stock Price + Growth Rate = 1.25*(1+6%)/33 + 6% = 10.015%

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Part B:

Required Return = Annual Dividend/Current Stock Price*100 = 4/45*100 = 8.89%

Thanks.

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