You’ve collected the following information from your favorite financial website.
ID: 2614739 • Letter: Y
Question
You’ve collected the following information from your favorite financial website.
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? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Current stock price? $
Based on these assumptions, is the stock currently overvalued, undervalued, or correctly valued?
Yld % PE
Ratio Close
Price Net
Chg Hi Lo 77.40 10.43 Palm Coal .36 2.6 6 13.90 –.24 55.81 33.42 Lake Lead Grp 1.54 3.8 10 40.43 –.01 131.05 70.10 SIR 2.60 2.9 10 89.09 3.07 50.24 13.95 DR Dime .80 5.2 6 15.43 –.26 35.00 20.74 Candy Galore .32 1.5 28 ?? .18
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? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Current stock price? $
Based on these assumptions, is the stock currently overvalued, undervalued, or correctly valued?
Explanation / Answer
Dividend amount of current year of Rs. 2.60 is already given in question.
Under Divident Discount Model the Value of Share is basically the Present Value of all Future Dividend amount at Expected rate of Return.
The Computation of Share Price is as Below :-
Hence the Share Price as per Divident Discount Model of SIR is $ 40.55. Since the Closing price is $ 89.09, the stock price is much overated as compare to the price as per Dividend Discount Model.
* Amt. of Dividend for Year 5
Normal Dividend = 5.302 +19.5% = 6.336 --------(a)
Perpetuity Dividend = Since growth rate falls to 5% from 6th year the Expected Dividend would be 6.336-(6.336*5%) = $ 6.0192
therefore from sixth year there would be dividend of 6.0192 for perpetuity.
The Present Value of this perpetuity at the begining of year 6/ end of year 5 will be 6.0192/13%
= 46.301 ------------(b)
Total Dividend for year 5 = a+b
= 6.336 + 46.301
= $ 52.367
Year Dividend DF @ 13% PV 1 3.107 (2.6+19.5%) 0.885 2.75 2 3.713 (3.107+19.5%) 0.783 2.908 3 4.437 0.693 3.075 4 5.302 0.613 3.252 5 52.367 (*) 0.543 28.569 Share Price 40.55Related Questions
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