In practice, a common way to value a share of stock when a company pays dividends to value the dividends over the next five years or so, then find the "terminal" stock pric using a benchmark PE ratio. Suppose a company just paid a dividend of $1.27. TH dividends are expected to grow at 12 percent over the next five years. The company ha a payout ratio of 30 percent and a benchmark PE of 22. The required return is 1 percent. a. What is the target stock price in five years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the stock price today? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
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.
![Problem 7-30 PE and Terminal Stock Price [LO 1]
In practice, a common way to value a share of stock when a company pays dividends is
to value the dividends over the next five years or so, then find the "terminal" stock price
using a benchmark PE ratio. Suppose a company just paid a dividend of $1.27. The
dividends are expected to grow at 12 percent over the next five years. The company has
a payout ratio of 30 percent and a benchmark PE of 22. The required return is 14
percent.
a. What is the target stock price in five years? (Do not round intermediate calculations
and round your answer to 2 decimal places, e.g., 32.16.)
b. What is the stock price today? (Do not round intermediate calculations and round
your answer to 2 decimal places, e.g., 32.16.)
a. Target price in five years
b. Stock price today](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F63605ff9-dab3-4f9d-bcc4-d99251f45ea1%2Fca348b6d-5d92-4fa0-870f-962c45dada1d%2Favmblng_processed.jpeg&w=3840&q=75)
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