According to your research, the growth rate in dividends for SIR for the next fi

Question

According to your research, the growth rate in dividends for SIR for the next five years is expected to be 20.5 percent. Suppose SIR meets its growth rate in dividends for the next five years and then the dividend growth rate falls to 5.5 percent indefinitely. Assume investors require a return of 13 percent on SIR stock
According to the dividend growth model, what should the stock price be today?
Current stock price:
Based on these assumptions, is the stock currently overvalued, undervalued, or correctly valued? 00 points ou've collected the following information from your favorite financial website. Div PE Close Net YId % Ratio Price Chg 6 13.90 -24 3.8 10 40.43-01 2.4 10 88.99 3.07 5.2 6 15.43-26 7? 18 52-Week Price Stock (Div) Hi 77 40 Lo 10.43 Palm Coal 36 33.42 Lake Lead Grp 1.54 69.60 SIR 2.10 13.95 DR Dime 80 20.74 Candy Galore.32 2.6 55 81 130.95 50 24 35.00 1.5 28 According to your research, the growth rate in dividends for SIR for the next five years is exp of 13 percent on SIR stock. According to the dividend growth model, what should the stock price be today? (Do not roun Current stock price Based on these assumptions, is the stock currently overvalued, undervalued, or correctly valu Click to select) References eBook & Resources Worksheet Learning Objective 07-03 Explain work Difficulty: 2 Intermediate

Explanation / Answer

SOLUTION =

DIVIDEND YIELD = 2.4%

CURRENT PRICE OF SHARE OF SIR = $88.99

DIVIDEND YIELD = CURRENT DIVIDEND/ CURRENT PRICE PER SHARE

2.4% = CURRENT DIVIDEND/ 88.99

CURRENT DIVIDEND = 88.99*2,4%= $ 2.14

PRICE = D1/(1+R)^1+d2/(1+R)^2+D3/(1+R)^3+D4/(1+R)^4+ D5/(1+R)^5+P5/(1+R)^5

WHERE D0 = CURRENT DIVIDEND

R= REQ.RATE OF RETURN

G1= GROWTH RATE FOR 5 YEARS

G2= GROWTH RATE AFTER 5 YEARS

WHERE P5= D0(1+G1)^5(1+G2)^2/(R-G2)/(1+R)^5

=D0(1+G0)/(1+R)+D0(1+G1)^2/(1+R)^2+D0(1+G1)^3/(1+R)^3+D0(1+G1)^4/(1+R)^4+D0(1+G1)^5/(1+R)^5+D0(1+G1)^5(1+G2)^2/(R-G2)/(1+R)^5

=2.14(1.205)/1.13+2.14(1.205)^2/(1.13)^2+2.14(1.205)^3/(1.13)^3+2.14(1.205)^4/(1.13)^4+2.14(1.205)^5/(1.13)^5+2.14(1+0.205)^5(1+0.055)/(0.13-0.055)(1+0.13)5

= 2.2704+2.4237+2.5875+2.7572+2.943+2.14*2.54*1.055/0.075/(1.13)^5

= 2.2704+2.4237+2.5875+2.7572+2.943+41.2888= $ 54.27(APPROX)

MARKET VALUE OF SHARE = $88.99, HENCE THE SHARE IS OVERVALUED.

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