5. Constant growth stocks SCI just paid a dividend (Do) of $3.60 per share, and

Question

5. Constant growth stocks SCI just paid a dividend (Do) of $3.60 per share, and its annual dividend is expected to grow at a constant rate (g) of 7.50% per year. If the required return (r) on SCI's stock is 18.75%, then the intrinsic value of SCI's shares is per share. Which of the following statements is true about the constant growth model? O When using a constant growth model to analyze a stock, if an increase in the growth rate occurs while the required return remains the same, this will lead to an increased value of the stock. O When using a constant growth model to analyze a stock, if an increase in the growth rate occurs while the required return remains the same, this will lead to a decreased value of the stock. 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 per share. If SCI's stock is in equilibrium, the current expected capital gains yield on SCI's stock will be

Explanation / Answer

Part 1

Growth Rate = 7.5%

Required Rate = 18.75%

D0 = 3.60

Price = 3.60 * (1 + 7.5%)/ (18.75% - 7.5%)

Price = 34.40

Part 2

The gordon growth formula is:

P0 = D0 * (1 + g)/ (Required rate - Growth Rate)

As growth rate is in denominator and also getting subtracted.

As growth rate increases, it will increase the numerator and at same time decrease the denominator if we are keeping required rate constant. which will lead to increase in stock price

Option A is correct

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