5. Constant growth stocks SCI just paid a dividend (Do) of $2.64 per share, and

Question

5. Constant growth stocks SCI just paid a dividend (Do) of $2.64 per share, and its annual dividend is expected to grow at a constant rate (g) of 5.50% per year. If the required return (r) on SCI's stock is 13.75%, 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 can be used if a stock's expected constant growth rate is less than its required return. O The constant growth model can be used if a stock's expected constant growth rate is more than its required return. 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. 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

Explanation / Answer

Question 5

Part 1) We need to use the Dividend growth model

Share price = Next year dividend / (Required return - Dividend growth)

Share price = (2.64 x (1.0550)) / (0.1375 - 0.0550)

Share price = 2.7852 / 0.0825

Share Price = $33.76

Part 2) Option A is correct. The constant growth model can be used if a stock's expected constant growth rate is less than its required return.

Part 3) Current expected dividend yield = Dividend x (1+dividend growth) / intrinsic value

Current expected dividend yield = 2.64(1.055) / 33.76 = 8.25%

SCI expected price one year from today will be $33.76 per share (as calculated above)

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