Akira has decided that the stock of Gentle Bidders is overvalued at $7 a share and short sales cannot be executed on margin, so Akira must put up the entire value of the stock when it is sold short. (a). What is the percentage loss if the price of the stock rises to $13? (b). What is the percentage gain if the company goes bankrupt and is dissolved? (c). What is the maximum percentage gain the short seller can earn and the largest percentage loss the short seller can sustain? (d). From the short seller’s perspective, what are the best and worst-case scenarios?
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.
Akira has decided that the stock of Gentle Bidders is overvalued at $7 a share and short sales cannot be executed on margin, so Akira must put up the entire value of the stock when it is sold short.
(a). What is the percentage loss if the price of the stock rises to $13?
(b). What is the percentage gain if the company goes bankrupt and is dissolved?
(c). What is the maximum percentage gain the short seller can earn and the largest percentage loss the short seller can sustain?
(d). From the short seller’s perspective, what are the best and worst-case
scenarios?
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