Assume capital markets are perfect. Kabo Industries currently has $12 million invested in short term Treasury securities paying 8%, and it pays out the interest payments on these securities each year as a dividend. The board is considering selling the Treasury securities and paying out the proceeds as a one-time dividend payment. i. If the board went ahead with this plan, what would happen to the value of Kabo stock upon the announcement of a change in policy? ii. What would happen to the value of Kabo stock on the ex-dividend date of the one-time dividend? iii. Given these price reactions, will this decision benefit investors?
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.
Assume capital markets are perfect. Kabo Industries currently has $12 million invested in short
term Treasury securities paying 8%, and it pays out the interest payments on these securities
each year as a dividend. The board is considering selling the Treasury securities and paying out
the proceeds as a one-time dividend payment.
i. If the board went ahead with this plan, what would happen to the value of Kabo stock upon
the announcement of a change in policy?
ii. What would happen to the value of Kabo stock on the ex-dividend date of the one-time
dividend?
iii. Given these price reactions, will this decision benefit investors?
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