MEGG Inc. just paid a dividend of $2.00 per share on its stock. The dividends are expected to grow at a constant 6 percent per year indefinitely. If investors require a 13 percent return on the stock, what is the current price? What will the price be in 3 years? In 15 years? Do 8 Ke Po This is a dividend constant growth valuation problem. see text p. 209 for formula Po= #DIV/0! todays price What will the price be in? end of year 3 D1 D2 $$ Ke is required return of investor g is the constant growth rate of dividends in perpetuity Do is the current dividend D3 $ Price at the end of year 15 D2 D3 D1 D4 $ 2.12 $ 2.25 $ 2.38 $ . Do (1+g)/(Ke-g) 4 use the constant growth formula using D3 as the dividend to grow P3 P3= D3*(1+g)/(Ke-g) D5 $ 5 D6 $- 6 D7 $ 7 D8 $ 8 D9 $ 9 D10 $ 10 11 12 13 D11 D12 $ $ D13 $ D14 $ 14 15 D15 $ use the constant growth formula using D15 as the dividend to grow P15 P15= D15*(1+g)/(Ke-g)
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.
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