Question

6. Constant growth stocks Consider the case of Urban Drapers Inc.: Urban Drapers Inc., a drapery company, has been successfully doing business for the past 15 years. It went public eight years ago and has been paying out a constant dividend of $3.20 per share every year to its shareholders. In its most recent annual report, the company informed investors that it expects to maintain its constant dividend into the foreseeable future and that dividends are not expected to increase. If you are an investor who requires a 29.86% rate of return and you expect dividends to remain constant forever, then your expected valuation for Urban Drapers' stock today is $ per share. (Note: Round your answer to two decimal places.) Urban Drapers has a sister company named Super Carpeting Inc. (SCI). SCI just paid a dividend (Do) of $2.40 per share, and its annual dividend is expected to grow at a constant rate (gl) of 5.00% per year. If the required return (rs) on SCI's stock is 12.50%, then the intrinsic value of SCI'S shares is $ per share. (Note: Do not round intermediate calculations. Round your final answer to two decimal places.) Which of the following statements is true about the constant dividend 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. Use the constant dividend growth model to calculate the appropriate values to complete the following statements about Super Carpeting Inc.: per share. • If SCI's stock is in equilibrium, the current expected dividend yield on the stock will be approximately • SCI's expected stock price one year from today will be approximately per share. • If SCI's stock is in equilibrium, the current expected capital gains yield on SCI's stock will be approximately per share.

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

? v 06:40 ENG 24-02-2020 25 Cu 402 - - ca 402 403 as CT cu cv cw cx a X fx CR urban drappers dividend = 3.2 ke = 29.86% constant dividend per share 404 405 PO = PO = dividend/required rate 10.72 [3.2/29.86%] 406 407 408 ANSWER 409 410 411 412 SUPER CARPETING 413 DO = 2.40 g=5% ke = 12.50% D1=DO*(1+g) = 2.40(1+0.05) = 2.5200 414 415 416 417 ANSWER 418 419 ANSWER 420 421 PO = D1/(ke-g) PO = 2.52/(12.50%-5%) = 33.60 (NO INTERMEDIATE ROUNDING IS DONE) TRUE STATEMENT FIRST THE CONSTANT GROWTH MODEL IMPLIES THAT DIVIDEND GROWTH REMAINS CONSTANT FROM NOW TO INFINITY 422 423 ANSWER CURRENT EXPECTED DIVIDEND YIELD = D1/PO = 2.52/33.60 = 7.50% 424 EXPECTED STOCK PRICE ONE YEAR FROM TODAY = PO*(1+g) = 33.60*(1+0.05) = 425 CURRENT EXPECTED CAPITAL GAIN YIELD = REQUIRED RETURN - DIVIDEND YIELD = KE CAPM UTILITY, SHARPE, beta coNvexity DGM beta port future INDEX INTL CAP BUD SANDRINE LEASING 35.28 12.50% - 7.50% = PV, FV, ANNUITY DIR right 5.00% clean YIEL ...