Urban Drapers Inc., a drapery company, has been successfully doing business for

Question

Urban Drapers Inc., a drapery 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 $3.20 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 into the foreseeable future and that dividends are not expected to increase. If you are an investor who requires a 13.68% 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. (SCI), SCI just paid a dividend (Do) of $2.40 per share, and its annual dividend is expected to grow at a constant rate (gL) of 5.00% per year. If the required return (g) on SCI's stock is 12.50%, then the intrinsic value of SCI's shares is per share. Which of the following statements is true about the constant dividend growth model? O The constant growth model implies that dividends remain constant from now to a certain terminal year. O The constant growth model implies that dividend growth remains constant from now to infinity. Use the constant dividend 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 share per SCI's expected stock price one year from today will be per share. If SCI's stock is in equilibrium, the current expected capital gains yield on SCI's stock will be

Explanation / Answer

1-

value of stock

expected dividend/required rate of return

3.2/13.68%

23.39

2-

value of stock

expected dividend/(required return-growth rate)

(2.4*1.05)/(12.5%-5%)

33.6

3-

dividend growth remains constant from now to infinity

4-

dividend Yield = EXPECTED DIVIDEND/MARKET PRICE

2.4/33.6

7.14%

5-

EXPECTED PRICE AFTER ONE YEAR

33.6

6-

CAPITAL GAIN Yield

(33.6-32)/32

5.00%

current price

2.4/12.5%-5%

32

1-

value of stock

expected dividend/required rate of return

3.2/13.68%

23.39

2-

value of stock

expected dividend/(required return-growth rate)

(2.4*1.05)/(12.5%-5%)

33.6

3-

dividend growth remains constant from now to infinity

4-

dividend Yield = EXPECTED DIVIDEND/MARKET PRICE

2.4/33.6

7.14%

5-

EXPECTED PRICE AFTER ONE YEAR

33.6

6-

CAPITAL GAIN Yield

(33.6-32)/32

5.00%

current price

2.4/12.5%-5%

32

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