Investors require a 10 percent per year return on the stock of the Rabiya’s Corporation, which anticipates a non-constant growth pattern for dividends. The company paid a $2.50 per share dividend. The dividend is expected to grow by 15 percent per year until the end of year 4 (i.e., for the next 3 years) and 7 percent thereafter. Determine the following: (a) Project dividends for years 1through 4. (b) Compute the present value of the dividends in part (a). (c) Project the dividend for the fifth year (D5).
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.
Investors require a 10 percent per year return on the stock of the Rabiya’s Corporation, which anticipates a non-constant growth pattern for dividends. The company paid a $2.50 per share dividend. The dividend is expected to grow by 15 percent per year until the end of year 4 (i.e., for the next 3 years) and 7 percent thereafter.
Determine the following:
(a) Project dividends for years 1through 4.
(b) Compute the
(c) Project the dividend for the fifth year (D5).
(d) Find the present value of all future dividends beginning with the fifth year’s dividend. The present value you find will be at the end of the fourth year. Use the formula P4= D5/(r-g).
(e) Discount back the value found in part (d)for 4 years at 10 percent.
f) Determine the value of the stock Po.
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
