Question

Super Carpeting Inc. just paid a dividend (D0D0) of $2.16, and its dividend is expected to grow at a constant rate (g) of 3.15% per year.

If the required return (rsrs) on Super’s stock is 7.88%, then the intrinsic, or theoretical market, value of Super’s shares is   per share.

Which of the following statements is true about the constant growth model?

When using a constant growth model to analyze a stock, if an increase in the required rate of return occurs while the growth rate remains the same, this will lead to an increased value of the stock.

When using a constant growth model to analyze a stock, if an increase in the required rate of return occurs while the growth rate remains the same, this will lead to a decreased value of the stock.

Use the constant growth model to calculate the appropriate values to complete the following statements about Super Carpeting Inc.:

•	If Super’s stock is in equilibrium, the current expected dividend yield on the stock will be   per share.
•	Super’s expected stock price one year from today will be   per share.
•	If Super’s stock is in equilibrium, the current expected capital gains yield on Super’s stock will be   per share.

Answer 1

When using a constant growth model to analyze a stock, if an increase in the required rate of return occurs while the growth rate remains the same, this will lead to a decreased value of the stock.

Current expected Dividend yield=r-g=7.88%-3.15%=4.73%
Expected stock price=D2/(r-g)=2.16*(1+3.15%)^2/(7.88%-3.15%)=48.58823
Current expected capital gains yield=g=3.15%