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http: /courses aplia com af servlet/quiz quiz_action-take uz&quiz; Aplia: Student Question eEconomics question Chegg c Previous NextD options I X Find: 7. Constant growth stocks Aa Aa Urban Drapers Inc., a draperies company, has been successfully doing business for the past 15 years. It went public eight years ago and has been paying out a constant dividend of $2.24 per share every year to its shareholders. In its most recent annual report, the company informed investors that it expects to maintain its constant dividend in the foreseeable future and that dividends are not expected to increase. If you are an investor who requires a 30.00% rate of retum and you expect dividends to remain constant forever, what will be your valuation for Urban Drapers stock today? Urban Drapers has a sister company named Super Carpeting Inc. Super Carpeting Inc. just paid a dividend (Do) of $1.68, and its dividend is expected to grow at a constant rate (g) of 3.50% per year. If the required retum ( on Super's stock is 8.75%, what is the intrinsic value of Super's shares? O $33.12 per share O $32.00 per share O $34.80 per share $48.00 per share Which of the following statements is true about the constant growth model? O When using a constant growth model to analyze a stock, if an increase in the required rate of return occurs while the growth rate remains the same, this will lead to a decreased value of the stock O When using a constant growth model to analyze a stock, if an increase in the required rate of return occurs while the growth rate remains the same, this will lead to an increased value of the stock Use the constant growth model to calculate the appropriate values to complete the following statements about Super Carpeting Inc.: If Super's stock is in equilibrium, the current expected dividend yield on the stock will be per share. Super's expected stock price one year from today will be If Super's stock is in equilibrium, the current expected capital gains yield on Super's stock will be per share. Session Timeout 59:13 12:44 PM 4/8/2016

Explanation / Answer

Part A

If the stock price is $2. 24 and required return is 30.00% then

stock price is,

2.24(1+0)/0.30-0= $ 7.47

Part B

if the stock price is $1.68 and required rate of return is 8.75% and growth rate is 3.50%,then

1.68(1+3.50)/ 8.75-3.50 = $33.12

Part C

When using constant growth model to analyse stock, if an increase in the required rate of return occures while the growth rate remain same, this will lead to an increased vale of stock.

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