TOTO00000415791400a0000cx cjrubin110006 Urban Drapers Inc a

TOTO00000415791400a0000&cx; cjrubin11-0006 Urban Drapers Inc , a drapery company, has been successfully do ng business for the past 15 years it went ouble eight years ago and has been paying out a constant dividend of $3 52 per share every year to most recent annual report, the conpany informed investors that texpects to maintain its constant dividend shareholders in foreseeable future and that dividends are not expected to increase. the If you are an investor who requires a 22,50% rate of retum and you expect dividends to remain constant forever then your expected valuation for Urban Drapers stock today is $15 64 per share Urban Drapers has a sister company named Super Carpeting ine (SC). Sa just paid a dividend (D) of $2.64 per share, and its annual dividend is expected to grow at a constant rate (9) of 5.50% per year if the required retum (.) on sa\'s stock 15 13 75%, then the intrinsic value of sa\'s shares is 33.76 per share Which of the following statements is true about the constant growth mode When uuing a constant growth model to analyze a stock, if an increase in the required rate of return cours while the growth rate remains the same, this will lead to a decreased value of the stock O when using a constant growth model to analyze a stock, if an increase in the required rate of retum occurs while the growth rate remains the same, this will lead to an increased value of the stock 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 current expected dividend yield on the stock wil be per share SCI\'s expected stock prior one year from today wil be per share if SCI\'s stock is in equilibrium, the current expected capital gains yield on SCI\'s stock wil be Te to search

Solution

Part C.

1). If Stock is in equilibrium, the current expected dividend yield on the stock will be:

In constant growth, expected dividend yield = D1 /P0 and P0 =D1 /(r-g)
D1 = 2.64(1.055) = $2.7852
P0 = $33.76
Expected dividend yield = D1/P0 = 2.7852/33.76 = 8.25%

2). Expected stock price one year from today :
P1= D2/ (r-g) =
= 2.64(1.055)^2 / (0.1375 - 0.055)
= 2.9383 / 0.0825
= $35.62

3). If stock is in equilibrium, the current expected capital gains yield on Super’s stock is:
In constant growth, expected capital gains = expected growth rate