CDD is expected to pay a dividend of $0.20 annually, a year from today. It is estimated that during the next four years such as years 2 through 5, the dividend will grow up at an annual rate of 16 percent. After the growth rate will be equal to 12 percent per year and continue at that rate indefinitely. Show your working I) Calculate the present value of the stock of CDD if the Treasury bill rate is 9%, the beta for CDD is 1.1 and the return on market is 14.45%. ii) What is your decision if the stock is currently selling at $7.00? show your calculations for this stock's intrinsic value using the dividend valuation model.
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.
CDD is expected to pay a dividend of $0.20 annually, a year from today. It is estimated that during the next four years such as years 2 through 5, the dividend will grow up at an annual rate of 16 percent. After the growth rate will be equal to 12 percent per year and continue at that rate indefinitely.
Show your working
I) Calculate the
ii) What is your decision if the stock is currently selling at $7.00? show your calculations for this stock's intrinsic value using the dividend valuation model.
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