Google recently had a market cap of $194 billion, total equity of $46.2 billion, and 321 million shares outstanding. At about the same time, the PB of Yahoo and eBay were 1.73 and 2.4 respectively. Assume that we desire a minimum 12% annual return on our investments, and that we believe Google will sell at 2.1 times book value five years from now. What must Google earn (ROE) on average over the next 5 years to make it a worthwhile investment? (Assume that Google pays no dividends.) Do not round until your final answer. Round final answer to one decimal place (ex: 0.2345 =23.5%).
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.
Determining
Google recently had a market cap of $194 billion, total equity of $46.2 billion, and 321 million shares outstanding. At about the same time, the PB of Yahoo and eBay were 1.73 and 2.4 respectively. Assume that we desire a minimum 12% annual
(Assume that Google pays no dividends.)
Do not round until your final answer. Round final answer to one decimal place (ex: 0.2345 =23.5%).
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