Question
option 1) $0.18 or $1.60 or $17.78 or $5.63
option 2) $34.40, $32.00, $38.00, $48.00
option 3)12.09%, 11.25%, 8.06%, 10.47%
option 4) $34.40, $32.00, $22.19, $36.98
constant growth and zero growth dividend valuation model Urban Drapers Inc., a drapery compan eight years ago and has been paying out a constant dividend of $4.80 per share every 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. y, has been successfully doing business for the past 15 years. It went public year to its shareholders. In its If you are an investor who requires a 27.00% rate of return and you expect dividends to remain constant forever. then your expected valuation for Urban Drapers stock today is per share. Urban Drapers has a sister company named Super Carpeting Inc. (Sc). SC just paid a dividend (Do) of $3.60 per share, (ke) on SCI's stock is 18.75%, then the expected stock price or scrs and its annual dividend is expected to grow at a constant rate (g) of 7.50% per year. If the required return per share. Which of the following statements is true about the constant growth model? if an increase in the required rate of return occurs O When using a constant growth model to analyze a stock, e stock. while the growth rate remains the same, this will lead to a decreased value of th a constant growth model to analyze a stock, if an increase in the required rate of return occurs O When using 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 Carpeting Inc.: value of the stock), the current expected dividend yield on the stock will be . SCI's expected stock price one year from today will be If SCI's stock is in equilibrium (that is, where the expected stock price is equal to the market per share.
Explanation / Answer
Answer a.
Constant Dividend = $4.80
Required Return = 27%
Current Stock Price = Constant Dividend / Required Return
Current Stock Price = $4.80 / 0.27
Current Stock Price = $17.78
Answer b.
Last Dividend, D0 = $3.60
Growth Rate, g = 7.50%
required return, r = 18.75%
D1 = D0 * (1 + g)
D1 = $3.60 * 1.075
D1 = $3.87
Stock Price, P0 = D1 / (r - g)
Stock Price, P0 = $3.87 / (0.1875 - 0.075)
Stock Price, P0 = $34.40
Answer c.
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 stock.
Answer d.
Dividend Yield = D1 / P0
Dividend Yield = $3.87 / $34.40
Dividend Yield = 11.25%
P1 = P0 * (1 + g)
P1 = $34.40 * 1.075
P1 = $36.98
