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.
At the end of 2020, CVN ltd. had 120,000 shares of common stock outstanding and had earnings available
for common of $300,000. TPO ltd., at the end of 2020, had 15,000 shares of common stock outstanding and
had earned $28,000 for common shareholders. CVN’s earnings are expected to grow at an annual rate of 6%
in next 6 years, and TPO’s growth rate in earnings would be 12% per year in next 6 years.
Calculate earnings per share (EPS) for CVN and TPO for year 2020 and each of the next 6 years if CVN
acquires TPO at a ratio of exchange of 1.3.
Describe the initial effect and long run effect on EPS of CVN and TPO. Does merger look beneficial for
CVN and TPO? Why or why not?
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