3. As a financial analyst, you are tasked with finding the price per share of XYZ, a telecom company. (a) For this part, assume that the Gordon growth model for stock valuation holds. The typical company in the telecom industry has a ratio of next period's dividend to current price D1/Po = 2%, pays out 40% of earnings as dividends, and generates a return on equity of 15%. Your analysis suggests that the discount rate of the typical company in the telecom industry is appropriate to value XYZ's stock. What is this discount rate? 2 (b) For this part of the analysis, the discount rate is from part (a). You assume that the differential dividend growth approach (i.e., the two-stage DDM) can be used to correctly value XYZ's stock. XYZ just paid $2 per share in dividends. You estimate that dividends will grow at 20% for next four years until year 4, and then at 5% perpetually. Find the current price per share of XYZ.
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
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