AlphaDog Corp Ltd. is a company with a remarkably stable dividend paying policy. It also chooses not to reinvest any of its earnings and all profits are paid out as dividends to its investors. have found from past records that the yearly dividend per share was $100 and there is no expectation of increase in the profits or in the dividends.You are considering buying 1000 shares and holding them for a period of 3 years, with an expected value at the end of $885 per share. The discount rate is given by the required rate of return, which is equal to 11.3%. What is the maximum amount you should be willing to pay? Because: Where: PV = present value of the investment Dt = dividend paid out in time t Pn – Price of the stock in the final period n (the price when the stock is sold after a holding period) You calculate the present value of one share as: The present value of one share is $884.99. 1000 shares would then be worth $884,990. In this example of a stable dividend and interest rates, it is hardly surprising that the present value is almost perfectly equal to the price upon selling (the 1 cent difference is caused only by rounding up the selling price). Questions: NeverEverChanging Ltd. is a company with a remarkably stable dividend paying policy. It also chooses not to reinvest any of its earnings, and all profits are paid out as dividends to its investors. Yearly dividend per share in the past was $50 and there is no expectation of increase in the profits or in the dividends. You are considering buying 2000 shares and holding them for a period of 3 years, with an expected value at the end of $500 per share. The discount rate is given by the required rate of return, which is equal to 10.0%. 1) What is the maximum amount you should be willing to pay? 2) What would be the maximum amount you should be willing to pay, if the required rate of return was 5%?
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.
AlphaDog Corp Ltd. is a company with a remarkably stable dividend paying policy. It also chooses not to reinvest any of its earnings and all profits are paid out as dividends to its investors. have found from past records that the yearly dividend per share was $100 and there is no expectation of increase in the profits or in the dividends.You are considering buying 1000 shares and holding them for a period of 3 years, with an expected value at the end of $885 per share. The discount rate is given by the required
Because:
Where:
PV =
Dt = dividend paid out in time t
Pn – Price of the stock in the final period n (the price when the stock is sold after a holding period)
You calculate the present value of one share as:
The present value of one share is $884.99. 1000 shares would then be worth $884,990.
In this example of a stable dividend and interest rates, it is hardly surprising that the present value is almost perfectly equal to the price upon selling (the 1 cent difference is caused only by rounding up the selling price).
Questions:
NeverEverChanging Ltd. is a company with a remarkably stable dividend paying policy. It also chooses not to reinvest any of its earnings, and all profits are paid out as dividends to its investors. Yearly dividend per share in the past was $50 and there is no expectation of increase in the profits or in the dividends. You are considering buying 2000 shares and holding them for a period of 3 years, with an expected value at the end of $500 per share. The discount rate is given by the required rate of return, which is equal to 10.0%.
1) What is the maximum amount you should be willing to pay?
2) What would be the maximum amount you should be willing to pay, if the required rate of return was 5%?
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