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MindTap . Cengage learn,- chegg Yahoo Search R ng engage omis tich b/ / de cht n bld 580719&nblodeid; 210996104&deploym; entld-551651215053483539471 MINDTAP Assignment 09 -Stocks and Their Valuation Due Today at 11 PM CDT 5. Constant growth stocks Sci just paid a divíidend (Do) of $3.12 per share, and its annual dividend is expected to grow at a constant rate (g) of AaAa 6.50% per year. If the required return (r) on scrs stock is 16.25%, then the intrinsic value of Sci's shares is per share. Which of the following statements is true about the constant growth model? O The constant growth model can be used if a stock's expected constant growth rate is more than its required return. O 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 ament expected dividend yield on the stock will be · per share. SCI's expected stock price one year from today will be . If sCI's stock is in equilibrium, the current expected capital gains yield on SCI's stock will be per share.Explanation / Answer
D1=3.12*(1+6.5%)=3.3228
g=6.5%
r=16.25%
Intrinsic value or Current Price=D1/(r-g)=3.3228/(0.1625-0.065)=34.08
As we see in the above formula if r<g, Price is negative, which is impossible. hence, we use constant growth only when constant growth is less than its required return
Current Expected Dividend Yield=D1/Current Price=3.3228/34.08=9.75%
Current expected capital gains=(Price one year from today-Price now)/price now=(36.2952-34.08)/34.08=6.5%
Price one year from today=D2/(r-g)=3.3228*1065/(0.1625-0.065)=36.2952