Leong has been following the stock of Axiata Berhad, and after conducting extensive analysis, he feels the stock is about ready to move. Specifically, he believes that within the next six months, Axiata Berhad could go to about RM50 per share, from its current level of RM35.90. The stock pays annual dividends of RM1.50 per share. Leong figures he would receive two quarterly dividend payments over his six-month investment horizon. In studying Axiata Berhad, Leong has learned that the company has six-month call options (with RM31.25 and RM37.50 strike prices) listed on the Bursa Malaysia. The Bursa Malaysia calls are quoted at RM5.00 for the options with RM31.25 strike prices and at RM3.125 for the RM37.50 options. Required : Using a six-month holding period and assuming the stock does indeed rise to RM50 over this time frame: (i) Find the value of both calls, given that at the end of the holding period neither contains any investment premium. (ii) Compute the holding period return for each of the three investment alternatives open to Leong.
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.
Leong has been following the stock of Axiata Berhad, and after conducting extensive analysis, he feels the stock is about ready to move. Specifically, he believes that within the next six months, Axiata Berhad could go to about RM50 per share, from its current level of RM35.90. The stock pays annual dividends of RM1.50 per share. Leong figures he would receive two quarterly dividend payments over his six-month investment horizon.
In studying Axiata Berhad, Leong has learned that the company has six-month call options (with RM31.25 and RM37.50 strike prices) listed on the Bursa Malaysia. The Bursa Malaysia calls are quoted at RM5.00 for the options with RM31.25 strike prices and at RM3.125 for the RM37.50 options.
Required :
Using a six-month holding period and assuming the stock does indeed rise to RM50 over this time frame:
(i) Find the value of both calls, given that at the end of the holding period neither contains any investment premium.
(ii) Compute the holding period return for each of the three investment alternatives open to Leong.
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