a) The following information is given. The expected rate of return of the index in next year is 30%, return of T-Bills is %15. We consider a stock whose beta is 1.2. It is estimated that this firm will pay a dividend per share of 2 TL next year. Investors predict that dividends will grow at the constant rate of 15% in future years. Then what may be the fundamental price of that stock? rate of b) Will you consider to buy that stock if its current market value is 12.4 TL per share? 3) In the problem above (question 2); let us assume that investors rather than predicting one growh rate of 15% ; predict two different growh rates. It is estimated that the dividends will grow at the rate of 10% in the next three years. Then the growth rate of dividends will accelerate to 20% starting in the fourth year and that growth rate will continue forever in the rest of future years. Given this; how the fundamental price of that stock changes ? (use the values of Question 2 in the answer. Only the growth rate is different in this question) b) Is that stock a good buy at the price of 12.4 per share with that new fundamental price?
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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