Question

Super Carpeting Inc. (SCI) just paid a dividend (D₀) of $3.12 per share, and its annual dividend is expected to grow at a constant rate (g) of 6.50% per year. If the required return (r ss ) on SCI’s 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? The constant growth model can be used if a stock’s expected constant growth rate is less than its required return. The constant growth model can be used if a stock’s expected constant growth rate is more than its required return.

Answer 1

$34.08

Step-by-step explanation:

a.) Price = D₁ / (r-g) whereby;

D₁ = expected dividend next year

r = required return

g = growth rate

D₁ = D₀*(1+g) = 3.12* (1.065) = 3.3228

So, Price = 3.3228 / (0.1625-0.065) = $34.08

b.)The constant growth model can be used if a stock’s expected constant growth rate is less than its required return

• This way the price of the stock won't be a negative number.