Consider company ABC. Today it is 1st of January 2023 and ABC has just paid a dividend of £3 million. The expected earnings of ABC for the next 30 years are forecast to grow at a rate of 15% per annum. From 1st of January 2053 and onwards the earnings of ABC are expected to grow at a rate of 5%. The required rate of return of ABC is 12% per annum. The current dividend policy of ABC is such that they pay out 50% of its earnings as dividends (assume that they pay their dividends on 1st of January every year). a) Suppose that the dividend payout ratio is expected to stay constant in the future. What is the value of ABC stock? Show and explain your calculations and any assumptions you make. b) Just after the dividend payment on 1st of January 2043, ABC is planning to reduce their dividends and only pay out 40% of its earnings. What is the value of ABC under the new dividend policy? c) Provide a recommendation to the management of ABC as to whether they should increase/cut back on dividends in the future. Can the dividend policy of ABC (in part b)) be improved on? Motivate your answer
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.
Consider company ABC. Today it is 1st of January 2023 and ABC has just paid a dividend of £3
million. The expected earnings of ABC for the next 30 years are
per annum. From 1st of January 2053 and onwards the earnings of ABC are expected to grow at a
rate of 5%. The required
The current dividend policy of ABC is such that they pay out 50% of its earnings as dividends
(assume that they pay their dividends on 1st of January every year).
a) Suppose that the dividend payout ratio is expected to stay constant in the future. What is the
value of ABC stock? Show and explain your calculations and any assumptions you make.
b) Just after the dividend payment on 1st of January 2043, ABC is planning to reduce their
dividends and only pay out 40% of its earnings. What is the value of ABC under the new
dividend policy?
c) Provide a recommendation to the management of ABC as to whether they should
increase/cut back on dividends in the future. Can the dividend policy of ABC (in part b)) be
improved on? Motivate your answer
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hey you didnt go up to 2053 only 2040 so the answers are wrong
by Bartleby Expertis there a way to do this question with formulas and a calculator instead of excel? if so please upload the solution this way
by Bartleby Expert
