Aa Aa 5. Constant growth stocks ScI just paid a dividend (Dy) of $1.68 per share

Question

Aa Aa 5. Constant growth stocks ScI just paid a dividend (Dy) of $1.68 per share, and its annual dividend is expected to grow at a constant rate (g) of 3.50% per year. If the required return (rs) on scrs stock is 8.75%, then the intrinsic value of SCI's shares is per share. which of the following statements is true about the constant growth model? 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. about Super Use the constant growth model to calculate the appropriate values to complete the following statements 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 per share If SCI's stock is in equilibrium, the current expected capital gains yield on SCt's stock will be e DOLL Tab

Explanation / Answer

a.Given Current Dividend(D0)=$1.68 per share

growth rate is 3.5% per year

Intrinsic value of share P0=D1/Ke-g

where P0= price of the share

D1 dividend after first year D1=D0(1+g)

Ke=cost of equity assuming as 10%

g=growth rate

then intrinsic value of share=D1/Ke-g

=$1.68*(1+0.035)/(0.10-.035)=$1.7388/0.065=$26.75

b.Second option is true Dividend growth remains constant from now to infinity as it involves equity growth which is never ended unless liquidated.

c(i).Sice Ke is not given also the price of the share then it is assumed that the result as per a. shall be considered as stock price and Ke as expected return so that we get Expected return as 10%

g=b*r(retention ratio*return)

3.5%=b*8.75% then b=40% then distributed return is 60% Hence return per share is $26.75*8.75%=$2.34

Hence dividend per share=$2.34*60%=$1.404

C(ii).Expected stock price after one year P1=D1(1+g)/Ke-g

=$1.7388(1+.035)/(0.10-.035)

=$1.799/0.065=$27.677

c(iii).If SCI stock is in equilibrium then current capital gain shall be $27.677-$26.75=$0.927

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