8. Constant growth stocks ScI just paid a dividend (Do) of $1.20 per share, and

Question

8. Constant growth stocks ScI just paid a dividend (Do) of $1.20 per share, and its annual dividend is expected to grow at a constant rate (g) of 2.50% per year. If the required return (r.) on SCI's stock is 6.25%, then the intrinsic value of SCI's shares is per share. Which of the following statements is true about the constant 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 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 sCIs stock will b per share.

Explanation / Answer

D0 = 1.20, g =2.5%, ke=6.25%

D1 = D0(1 + g) = 1.20 (1+0.025) = 1.23

P0 = D1(ke-g) = 1.23/(0.0625 - 0.025) = $32.8

WHICH OF THE FOLLOWING STATEMENT IS TRUE ABOUT CONSTANT GROWTH MODEL

CORRECT : THE CONSTANT GROWTH MODEL IMPLIES THAT DIVIDEND GROWTH REMAINS CONSTANT FROM NOW T0 INFINITY

EXPLANATION :AS WE HAVE SOLVED ABOVE, THE CONSTANT GROWTH MODEL ASSUMES THAT GROWTH RATE WILL BE CONSTANT, AND SO DIVIDEND WILL GROW EVERY YEAR BY GROWTH RATE GIVEN

IF STOCK IS IN EQUILIBRIUM, EXPECTED DIVIDEND YIELD WILL BE D1/P0 = 1.23/32.8 = 0.0375 = 3.75% PER SHARE

EXPECTED STOCK PRICE ONE YEAR FROM NOW = P1 =P0(1 + g) = 32.8(1+0.025) = 33.62 PER SHARE

IF STOCK IS IN EQUILIBRIUM, CURRENT EXPECTED CAPITAL GAIN YIELD =

= ke - DIVIDEND YIELD = 0.0625 -0.0375 = 0.025 = 2.5%

Related Questions

Navigate

• Browse (All)
• Browse 8
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.