An investor who is liable to 20% income tax is considering buying 1,000 shares of Goldmines PLC that pays annual dividends. The current dividend is £15 per share and has just been paid. Dividends are expected to grow on a compound basis by 7% per annum in each of the next 3 years, but only at 4% per annum in perpetuity thereafter. (i) (ii) Calculate the present value of the dividend stream described above, at a rate of interest of 10% per annum effective, for the investor. The investor decides to buy the 1,000 shares for the price found in part (i). She holds them for the first three years and receives the dividends payable. She then sells all of her holdings for £230,000 immediately after the third dividend is paid. Assuming dividends grow as expected, calculate the investor's real rate of return to the nearest 0.1%, given the following values of the inflation index over the period: Time t (years) t = 0 Inflation index: 110.0 t = 1 112.3 t = 2 113.2 t = 3 113.8
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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