Constant growth stocks Dismiss All Please Wait . . . Please Wait... $52.62 $45.7
ID: 2763524 • Letter: C
Question
Constant growth stocks
Dismiss All
Please Wait . . .
Please Wait...
$52.62
$45.71
$28.58
$47.62
per share.
Points:
Close Explanation
Explanation:
Which of the following statements is true about the constant growth model?
The constant growth model implies that dividend growth remains constant from now to infinity.
The constant growth model implies that dividends remain constant from now to a certain terminal year.
Points:
Close Explanation
Explanation:
Use the constant growth model to calculate the appropriate values to complete the following statements about Super Carpeting Inc.:
6.05%
4.38%
6.56%
6.30%
$49.68
$47.62
$45.71
$29.81
4.33%
104.33%
5.20%
3.90%
• If Super’s stock is in equilibrium, the current expected dividend yield on the stock will be selector 16.05%
4.38%
6.56%
6.30%
. • Super’s expected stock price one year from today will be selector 2$49.68
$47.62
$45.71
$29.81
per share. • If Super’s stock is in equilibrium, the current expected capital gains yield on Super’s stock will be selector 34.33%
104.33%
5.20%
3.90%
.Explanation / Answer
Answer:
(a) Intrinsic, or theoretical market, value of Super’s shares using dividend growth model
Value of stock = D1/ (k - g)
D1= Expected dividend per share in next year = $2.88 * 1.0420 = $3.00
k= Required rate of return = 10.50%
g = Expected dividend growth rate = 4.20%
Value of stock = $ 3.00 / (10.50% - 4.20%)
= $ 47.62 per share (Last option is correct)
(b) Correct statement is "The constant growth model implies that dividend growth remains constant from now to infinity". In formula (Value = D1/k-g), growth rate is deducted from required rate of return which shows that we have considered growth for infinity.
(c)Current Dividend Yield = Most recent full year dividend / Current share price
= 2.88 / 47.62 *(100) = 6.05% (First option is correct)
(d) Super’s expected stock price one year from today
= D2/(k-g)
= $3*1.0420/(10.50% - 4.20%)
= 3.127 / 6.30% = $ 49.68 (Option 1 is correct)
(e) Expected capital gain yield = Price per share after one year - Current price per share / Current price per share
= $ 49.68 - $ 47.62 / $ 47.62 = 4.33 % (Option 1 is correct)