Homework Sourseouve collected the following information from your favorite
ou’ve collected the following information from your favorite financial website.
According to your research, the growth rate in dividends for SIR for the next five years is expected to be 20.5 percent. Suppose SIR meets this growth rate in dividends for the next five years and then the dividend growth rate falls to 5.5 percent indefinitely. Assume investors require a return of 14 percent on SIR stock.
According to the dividend growth model, what should the stock price be today? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Current stock price $
| 52-Week Price | Stock (Div) | Div Yld % | PE Ratio | Close Price | Net Chg | |
| Hi | Lo | |||||
| 77.40 | 10.43 | Palm Coal .36 | 2.6 | 6 | 13.90 | –.24 |
| 55.81 | 33.42 | Lake Lead Grp 1.54 | 3.8 | 10 | 40.43 | –.01 |
| 131.11 | 70.40 | SIR 2.90 | 3.3 | 10 | 89.15 | 3.07 |
| 50.24 | 13.95 | DR Dime .80 | 5.2 | 6 | 15.43 | –.26 |
| 35.00 | 20.74 | Candy Galore .32 | 1.5 | 28 | ?? | .18 |
Solution
P5 = D6/(R - g)
= D0(1 + g1)5(1 + g2)/(R - g2)
= $2.90(1.205)5(1.055)/(0.14 - 0.055)
= $7.77/0.085 = $91.45
P0 = $2.9(1.205)/(1.14) + $2.9(1.205)2/(1.14)2 + $2.9(1.205)3/(1.14)3 + $2.9(1.205)4/(1.14)4 + $2.9(1.205)5/(1.14)5 + $91.45/1.145
= $3.065 + $3.24 + $3.425 + $3.62 + $3.83 + $47.49
= $64.67
