Simonson Investment Trust International (SITI) is expected to earn $ 4.00, $ 5.00, and $ 8.00 for the next three years. SITI will pay annual dividends of $ 2.00, $ 2.50, and $ 20.50 in each of these years. The last dividend includes a liquidating payment to shareholders at the end of year 3 when the trust terminates. SITI’s book value is $ 8 per share and its required return on equity is 10 percent.
A. What is the current value per share of SITI according to the dividend discount model?
B. Calculate per - share book value and residual income for SITI for each of the next three years and use those results to find the stock’s value using the residual income model.
C. Calculate return on equity and use it as an input to the residual income model to calculate SITI’s value.