SCI just paid a dividend (Do) of $2.64 per share, and its annual dividend is exp
ID: 2810944 • Letter: S
Question
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 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. 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. 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 beExplanation / Answer
Answer a.
Current Dividend, D0 = $2.64
Growth Rate, g = 5.50%
Required Return, rs = 13.75%
D1 = D0 * (1 + g)
D1 = $2.64 * 1.055
D1 = $2.7852
P0 = D1 / (rs - g)
P0 = $2.7852 / (0.1375 - 0.055)
P0 = $33.76
Intrinsic Value of Share is $33.76
Answer b.
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 decreased value of the stock.
Answer c.
Dividend Yield = D1 / P0
Dividend Yield = $2.7852 / $33.76
Dividend Yield = 8.25%
Price after one year = P0 * (1 + g)
Price after one year = $33.76 * 1.055
Price after one year = $35.62
Capital Gain Yield = (P1 - P0) / P0
Capital Gain Yield = ($35.62 - $33.76) / $33.76
Capital Gain Yield = 5.51%
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