Stock question regarding prices and required rate of return?

Question

My stock currently sells for $20 a share. The stock just paid a dividend of $1.00 a share. The dividend is expected to grow at a constant rate of 10 percent a year. What stock price can I expect a year from now?

A. $20.00
B. $20.50
C. $21.00
D. $22.00

Also what is the required rate of return?

Answer 1

I remember this class. It has so little to do with the way the stock market really works.

Your required rate of return is 5%. Since 1/20 = .05
When your dividend goes to 1.10, then 1.10 is 5% of 22
Or just increase the price by 10%. 20*1.1 = 22

D.

Answer 2

Maybe you meant what what is the dividend per share expected at the end of the year and the cost of retained earnings?

expected dividend would be:

D0 * (1+g)
= 1 * (1+.10)
= 1.10

Cost of retained earnings would be:

= (D1/P0) + g
= (1.10 / 20) + .10
= 15.5%

Stock price could be equal to anything a year from now regardless of the expected growth of the dividend.