Woidtke Manufacturing's stock currently sells for 20 a...

Woidtke Manufacturing's stock currently sells for $\$ 20$ a share. The stock just paid a dividend of $\$ 1.00$ a share (i.e., $D_{0}=\$ 1.00$ ). The dividend is expected to grow at a constant rate of $10 \%$ a year. What stock price is expected 1 year from now? What is the required rate of return on the company's stock?

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Key Concepts

Required Rate of Return

The required rate of return is the minimum annual percentage yield an investor expects to receive from an investment in a stock, accounting for risk. It is calculated within the dividend discount model framework by summing the dividend yield (the next period's dividend divided by the current stock price) and the growth rate of dividends, reflecting both the income and capital gains components of the total return.

Dividend Discount Model (DDM)

The dividend discount model is a valuation method that determines the current price of a stock by estimating the present value of all its future dividend payments. It is based on the theory that dividends represent the cash flows returned to shareholders and that a stock's value is the sum of these cash flows discounted back to their present value using a required rate of return.

Constant Dividend Growth

Constant dividend growth is an assumption that dividends will increase at a fixed percentage rate indefinitely. This simplifies the analysis by enabling the use of geometric growth formulas to predict future dividends and stock prices, and it is a key component of the Gordon Growth Model, a specific version of the dividend discount model.

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