According to your research, the growth rate in dividends for SIR for the next fi
ID: 2775398 • Letter: A
Question
According to your research, the growth rate in dividends for SIR for the next five years is expected to be 19.5 percent. Suppose SIR meets this growth rate in dividends for the next five years and then the dividend growth rate falls to 5 percent indefinitely. Assume investors require a return of 13 percent on SIR stock.
According to the dividend growth model, what should the stock price be today?
52-Week Price Stock (Div) DivYld % PE
Ratio Close
Price Net
Chg Hi Lo 77.40 10.43 Palm Coal 0.36 2.6 6 13.90 –0.24 55.81 33.42 Lake Lead Grp 1.54 3.8 10 40.43 –0.01 131.05 70.10 SIR 2.60 2.9 10 89.09 3.07 50.24 13.95 DR Dime 0.80 5.2 6 15.43 –0.26 35.00 20.74 Candy Galore 0.32 1.5 28 ?? 0.18
Explanation / Answer
Stock price be today = D1/(1+re) + D2/(1+re)^2 + D3/(1+re)^3 + D4/(1+re)^4 + D5/(1+re)^5 + (D6/(Re-g))/(1+re)^5
Stock price be today = 2.60*1.195/1.13 + 2.60*1.195^2/1.13^2 + 2.60*1.195^3/1.13^3 + 2.60*1.195^4/1.13^4 + 2.60*1.195^5/1.13^5 + (2.60*1.195^5*1.05/(13%-5%))/1.13^5
Stock price be today = $ 60.56
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