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

Question

Urban Drapers Inc, a draperies 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 $3.52 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 in the foreseeable future and that dividends are not expected to increase. If you are an investor who requires a 15.00% rate of return and you expect dividends to remain constant forever, what will be your valuation for Urban Drapers stock today? Urban Drapers has a sister company named Super Carpeting Inc. Super Carpeting Inc. just paid a dividend (D_0) of $2.64, and its dividend is expected to grow at a constant rate (g) of 5.50% per year. If the required return (r_s) on Super's stock is 13.75%, what is the intrinsic value of Super's shares? $19.20 per share $35.62 per share $33.76 per share $32.00 per share Which of the following statements is true about the constant growth model? The constant growth model can be used if a stock's expected constant growth rate is less than its required return. The constant growth model can be used if a stock's expected constant growth rate is more than its required return.

Explanation / Answer

Stock price, P0 = D1÷(r-g)

D1 is next expected dividend

r is required return

g is growth rate

= $3.52/15%

= $23.47

Stock price, P0 = D1÷(r-g)

D1 is next expected dividend

r is required return

g is growth rate

= $2.64×(1+5.5%)/(15%-5.5%)

= $29.32

Correct option is “The constant growth rate model can be used if a stock’s expected constant growth rate is less than its required return”

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