9. a. Doldrums Plastics has been paying a $3 dividend each year for two years andcompany reports indicate that management intends to continue this dividendpayment for the foreseeable future. The market determined required rate ofreturn on Doldrums's common stock is 15 percent, what will be the price of a shareof stock? b. Suppose that an aggressive new Chief Executive Officer, Dee Uamoca, is hired byDoldrums. Because of the productive policies and processes instituted byUamoca, capital market investors anticipate that Doldrums's earnings anddividends will increase at a constant 8 percent rate beginning immediately. Whatwould be the price of a share of Doldrums common stock if the required rate ofreturn remains at 15 percent?
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.
9. a. Doldrums Plastics has been paying a $3 dividend each year for two years and
company reports indicate that management intends to continue this dividend
payment for the foreseeable future. The market determined required rate of
return on Doldrums's common stock is 15 percent, what will be the price of a share
of stock?
b. Suppose that an aggressive new Chief Executive Officer, Dee Uamoca, is hired by
Doldrums. Because of the productive policies and processes instituted by
Uamoca, capital market investors anticipate that Doldrums's earnings and
dividends will increase at a constant 8 percent rate beginning immediately. What
would be the price of a share of Doldrums common stock if the required rate of
return remains at 15 percent?
Trending now
This is a popular solution!
Step by step
Solved in 5 steps with 4 images
