Super Carpeting Inc. (SCI) just paid a dividend (D₀) of $2.40 per share, and its annual dividend is expected to grow at a constant rate (g) of 5.00% per year. If the required return (r s) on SCI's stock is 12.50%, 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 can be used if a stock's expected constant growth rate is more than its required return. The constant growth model can be used if a stock's expected constant growth rate is less 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. • 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 per share.

Question

Business

Santiago Ashley

25 January, 17:42

Super Carpeting Inc. (SCI) just paid a dividend (D₀) of $2.40 per share, and its annual dividend is expected to grow at a constant rate (g) of 5.00% per year. If the required return (r s) on SCI's stock is 12.50%, 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 can be used if a stock's expected constant growth rate is more than its required return. The constant growth model can be used if a stock's expected constant growth rate is less 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. • 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 per share.

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Answers (1)

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Myles Malone · Answer 1

Consider the following calculations.

Explanation:

1)

Intrinsic value = D1 / (Required rate - growth rate)

Intrinsic value = (2.4 * 1.05) / 0.125 - 0.05

Intrinsic value = 2.52 / 0.075

Intrinsic value = $33.60

2)

The constant growth model implies that dividends growth rate remains constant from now to infinity.

3)

Current dividend yield = (D1 / current stock price) * 100

Current dividend yield = (2.52 / 33.6) * 100

Current dividend yield = 7.50%

Stock price 1 year from today = Present value (1 + growth rate)

Stock price 1 year from today = 33.6 * (1 + 0.05)

Stock price 1 year from today = $35.28

Capital gains yield = [ (Ending value - beginning value) / beginning value] * 100

Capital gains yield = [ (35.28 - 33.6) / 33.6] * 100

Capital gains yield = 5.00%