An analyst on Bloomberg News recently commented that Netflix stock will start paying dividends in the near future because of all of the cash flow that it generates. When pressed on the issue, the analyst made a bold forecast that Netflix will start paying its first dividend 4 years from now in the amount of $50 per share, after which the growth rate would be a constant rate of 3%, forever. Netflix has a debt-to-equity ratio (D/E) of 0.2, the annual YTM on the company’s bonds averages 4.4% and the company’s tax rate is projected to be 30% in the future. If the risk-free rate is 2.8%, the market risk premium is 6% and Netflix’s Beta is 1.2, what should the stock sell for today based on a discounted valuation of the future dividends that the analyst projected?
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.
An analyst on Bloomberg News recently commented that Netflix stock will start paying dividends in the near future because of all of the cash flow that it generates. When pressed on the issue, the analyst made a bold
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