raded Assignment Due Friday 12.22.17 at 11:45 Attempts: s. Constant growth stock
ID: 2807262 • Letter: R
Question
raded Assignment Due Friday 12.22.17 at 11:45 Attempts: s. Constant growth stocks SCI just paid a dividend (Do) of $2.64 per share, and its annual dividend is expected to grow at a constant rate (9) of Do No Harm: 15 A Aa 5.50% per year. If the required return (rs) on SCI's stock is 13.75%, then the intrinsic value of SCI's shares is 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 growth rate occurs while the required return remains the same, this will lead to an increased value of the stock. When using a constant growth model to analyze a stock, if an increase in the growth rate occurs while the required return remains the same, this will lead to a decreased value of the stock. Use the constant growth model to calculate the appropriate values to complete the following statements about Super Carpeting Inc.: If SCI's stock is in equilibrium, the current expected dividend yield on the stock will be per share. SCI's expected stock price one year from, today will be If SCI's stock is in equilibrium, the current expected capital gains yield on SCI's stock will be per shareExplanation / Answer
Answer 1.
D0 = $2.64
growth rate, g = 5.50%
required return, r = 13.75%
D1 = $2.64 * 1.055
D1 = $2.5024
P0 = D1 / (r - g)
P0 = $2.5024 / (0.1375 - 0.055)
P0 = $2.5024 / 0.0825
P0 = $30.33
So, intrinsic value of share is $30.33 per share
Answer 2.
When using a constant growth model to analysis stock, if an increase in the growth rate occurs while the required return remains the same, this will lead to an increase value of the stock.
Answer 3.
Dividend Yield = D1 / P0
Dividend Yield = $2.5024 / $30.33
Dividend Yield = 0.0825 = 8.25%
D1 = $2.5024
D2 = $2.5024 * 1.055
D2 = $2.6400
P1 = D2 / (r - g)
P1 = $2.6400 / (0.1375 - 0.055)
P1 = $2.6400 / 0.0825
P1 = $32.00
Capital Gain Yield = (P1 - P0) / P0
Capital Gain Yield = ($32.00 - $30.33) / $30.33
Capital Gain Yield = 0.0551 = 5.50%
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