App1 is a company that has a patent right for a new mobile technology that is expected to enable it to generate growth of 20% for next three years. From the beginning of year 4, the company expects to grow at a constant rate of 5%. The company just paid a dividend of $2.20 on 31 Dec of Year 0. (a) Compute the estimate of the current price of App1 shares. Assume the required return on equity is 10%.
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.
App1 is a company that has a patent right for a new mobile technology that is expected to
enable it to generate growth of 20% for next three years. From the beginning of year 4, the
company expects to grow at a constant rate of 5%. The company just paid a dividend of $2.20
on 31 Dec of Year 0.
(a) Compute the estimate of the current price of App1 shares. Assume the required return
on equity is 10%.
The estimate of the current price of shares refers to the valuation of a company's stock or shares at a specific point in time. It is an estimation of the fair value of a company's shares based on various financial and non-financial factors such as the company's financial performance, growth prospects, industry outlook, macroeconomic factors, and investor sentiment. This estimate helps investors and analysts to determine whether the stock is undervalued, overvalued, or fairly valued and make informed investment decisions.
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