Question
6. The following example shows how the stock price can drop substantially during 2022. Super Technology Inc. (STC) paid an annual dividend of $0.95 on
6. The following example shows how the stock price can drop substantially during 2022. Super Technology Inc. (STC) paid an annual dividend of $0.95 on June 30, 2021. If the STCs required rate of return is 7.5% and its dividend payout ratio remains constant, please find the share price of STC in July 2021 and July 2022 based on (a) and (b), respectively.
(a) In July 2021, analysts predicted an 10% annual growth rate in earnings over the next four years for STC. After then, STC was expected to grow constantly at the industry average of 5% per year.
(b) Inearly2022,STCannouncedaprofitwarningforthefirsthalfof2022.Analyststhus revised downward their four-year (year 2022 to year 2025) earnings growth rate for STC to 6%. STC was expected to grow steadily after four years. The weaker economy suggested a lower industry average rate, 3% growth per year.
(c) Ifthestockpriceis$28onJuly1,2022,assumingthatthedividendgrowthpathindeed followed (b) up to June 2022 (i.e., the growth rate from July 2021 to June 2022 is based on (b)), what would be the growth rate of STC anticipated by the market as of July 2022 based on a constant growth dividend discount model?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started