Consider the decision to buy the stock of company ABC. 1. Find the risk adjusted discount rate assuming the risk-free rate of return is 4 %, a stock market premium of 8% and the beta coefficient for ABC is 2. 2. Using the geometric mean, find the historical growth rate assuming the first dividend was in 1990 and had a value of 5. The latest dividend was in 2020 and had a value of 20. 3. Using the constant dividend growth model, and knowing the current dividend is 20, find the dividends calculated in part 2. fundamental value of ABC stock, using the historical growth rate 4. Assume the current market price of ABC stock is 200. Should you buy or sell ABC stock? Explain the reason for your decision.
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.
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