An analyst uses a two-stage variable growth model to estimate the value of Old Maid Company's common stock. The most recent annual dividend paid by the company was $3 per share. The analyst expects dividends to increase 8% per year for the next 3 years and then drop to 4% starting in year 4 and remain stable for the foreseeable future. The required rate of return used for the analysis is 10% a) What are the expected dividends for the next 4 years? b) What is the value of the stock attributable to the first 3 years of dividends? (use NPV function) c) What is the value of the stock at the end of year 3? (use constant-growth model) d) What is the value of the stock attributable to years 4 and beyond? (use PV function, where the answer to part C is the FV) e) What is the total value of the stock? Please show how to use the formulas such as PV and FV in Excel such as NPV Thank You!
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 uses a two-stage variable growth model to estimate the value of Old Maid Company's common stock. The most recent annual dividend paid by the company was $3 per share. The analyst expects dividends to increase 8% per year for the next 3 years and then drop to 4% starting in year 4 and remain stable for the foreseeable future. The required
a) What are the expected dividends for the next 4 years?
b) What is the value of the stock attributable to the first 3 years of dividends? (use
c) What is the value of the stock at the end of year 3? (use constant-growth model)
d) What is the value of the stock attributable to years 4 and beyond? (use PV function, where the answer to part C is the FV)
e) What is the total value of the stock? Please show how to use the formulas such as PV and FV in Excel such as NPV Thank You!
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