Assume that you are considering purchase of common stock issued by REC Corporation. Your research has shown that the dividends are paid regularly on a semiannual schedule. The most recent (past) semiannual dividend paid was D0 = $12 per share. In the future, dividends are expected to grow at an annual rate of 4%. You have determined that your required rate of return (discount rate) for this stock would be 6.5% per year. NOTE: $12 is the amount that was paid semiannually. It does not need to be divided by two. Based on this information, answer the following: A. What are the next four upcoming dividends for this common stock (i.e., D1, D2, D3, D4)? B. Using the Discounted Cash Flow Method, what is the value of this common stock? C. Assume that the current market price of this common stock is $325 per share. At this price, what is the stock's annual expected return according to the Discounted Cash Flow Method? D. Based on your answer to part B, would you invest in the REC common stock? Why or why not? E. Based on your answer to part C above, would you invest in the REC common stock? Why or why not?
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 that you are considering purchase of common stock issued by REC Corporation. Your research has shown that the dividends are paid regularly on a semiannual schedule. The most recent (past) semiannual dividend paid was D0 = $12 per share. In the future, dividends are expected to grow at an annual rate of 4%. You have determined that your required
Based on this information, answer the following:
A. What are the next four upcoming dividends for this common stock (i.e., D1, D2, D3, D4)?
B. Using the Discounted Cash Flow Method, what is the value of this common stock?
C. Assume that the current market price of this common stock is $325 per share. At this price, what is the stock's annual expected return according to the Discounted Cash Flow Method?
D. Based on your answer to part B, would you invest in the REC common stock? Why or why not?
E. Based on your answer to part C above, would you invest in the REC common stock? Why or why not?
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