Eliza in the middle of analyzing of her portfolio of Brex stock and Columbus stock. Brex Bhd. has issued 20 million shares of RM1 par value issued and outstanding. Current market price is RM8/share. The net income is 20% from its sales of RM250 million and the firm retain 70% of its income. Its total assets are RM300 million and its total liabilities is RM100 million. The firm growth rate of dividend is 20% for the next 2 years and declined by 8% in another 2 years and declined to 5% in year 5 thereafter. The beta is 1.2, the risk-free rate is 3.5% and the expected market return on portfolio is 10.5%. While Columbus stock has a constant growth rate of 8%, the required rate of return is 15%. The firm declared a dividend payment of RM15 million to its shareholders. Its price earnings ratio is 6.7 times and its earnings per share is RM5.45. Assume shares outstanding for Columbus also 20 million shares. Besides the above stocks, she plans to invest in Cicu stock. The stock expected to pay a dividend of RM1.20, second year RM1.50, third year RM2.10 and the fourth year is RM2.45.
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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