5. Constant growth stocks ScI just paid a dividend (Do) of $1.44 per share, and
ID: 2620127 • Letter: 5
Question
5. Constant growth stocks ScI just paid a dividend (Do) of $1.44 per share, and its annual dividend is expected to grow at a constant rate (g) of 3.00% per year. If the required return (r) on SCI's stock is 7.50%, 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 required rate of return occurs while the growth rate remains the same, this will lead to a decreased value of the stock. O 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 an increased value of the stock. Use the constant growth model to calculate the appropriate values to complete the following statements about Super Carpeting Inc.: 4516.j 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 share. *Explanation / Answer
D0 = $ 1.44
g = 3 %
r = 7.5 %
D1 = D0 * (1 +g) = 1.44 * 1.03 = 1.4832
Intrinsic value = D1/r-g
=$ 1.4832 / ( 0.075 - 0.03)
= $ 32.96
2. The following statement is true about the constant growth model
A) 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 the stock.
This is becuase in the equation: intirnsic vlaue = D1/(r-g) if r increase then the denominator becomes greater. in such a case we will get decreased intrinsic value for the stock
3. Dividend yield = annual dividend / Current stock
= 1.4832 / 32.96
= 4.5%
SCI's expected stock price one year from today = D2 / r-g
= 1.4832 * 1.03 / (0.075 - 0.03)
= 33.95
Capital gain yield = P1 - P0 / P0
= 33.95 - 32.96 / 32.96
= 3%
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