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.
Your assignment here is to value Walmart Inc.'s (WMT’s) stock. A bit oddly, WMT is not expected to pay a dividend at t = 1. WMT’s next dividend (i.e., the dividend at t = 2) is expected to be $3.00/share. Across years 3 and 4 and 5, dividends will grow by 8%/year. After that, dividends are projected to grow at a constant rate of 3% forever. Walmart has a debt-to-equity ratio (in market-value terms) of 1.0. The yield to maturity on WMT's bonds averages 4% and the company's tax rate is 30%. If the risk-free rate is 3.1%, the expected return on the market is 9.1%, and WMT's equity beta is 1.10, calculate a fair price at which the stock should sell for today, based on a discounted valuation of its projected dividends.
In order to calculate the stock price today, one needs to calculate the projected dividends for further years and then have to discount it.
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