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 $2.56 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 12.44% 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 (D00) of $1.92 per share, and its annual dividend is expected to grow at a constant rate (gLL) of 4.00% per year. If the required return (rss) on SCIs stock is 10.00%, then the intrinsic value of SCIs 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?

A.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.

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

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

	If SCIs stock is in equilibrium, the current expected dividend yield on the stock will be approximately___________ per share.
	SCIs expected stock price one year from today will be approximately___________ per share.
	If SCIs stock is in equilibrium, the current expected capital gains yield on SCIs stock will be approximately ________ per share.