Over the past 5 years, the dividends of Nova Inc. have grown at an annual rate of 15%. The current dividend (D0) is $3.5 per share. The dividend is expected to grow to $4 next year, then grow at an annual rate of 12% for the following three years and 8% per year thereafter. You require a 28% rate of return on this stock. What would you be willing to pay for a share of Nova Inc. stock today? Which of the following is/are true i. The security market line can be thought of as expressing relationships between expected required rates of return and beta. II. A stock with a beta of zero would be expected to have a rate of return equal to risk free rate. III. Assume that capital asset pricing model holds. Then, a security whose expected return falls belowthe SML (security market line) indicates that the security is undervalued, whereas a security whose expected return falls above the SML indicates that the security is overvalued. IV. The beta of the market portfolio is 1.
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.
Questions
- Over the past 5 years, the dividends of Nova Inc. have grown at an annual rate of 15%. The current dividend (D0) is $3.5 per share. The dividend is expected to grow to $4 next year, then grow at an annual rate of 12% for the following three years and 8% per year thereafter. You require a 28% rate of return on this stock. What would you be willing to pay for a share of Nova Inc. stock today?
Which of the following is/are true
- i. The security market line can be thought of as expressing relationships between expected required
rates of return and beta.
II. A stock with a beta of zero would be expected to have a rate of return equal to risk free rate.
III. Assume thatcapital asset pricing model holds. Then, a security whose expected return falls belowthe SML (security market line) indicates that the security is undervalued, whereas a security whose expected return falls above the SML indicates that the security is overvalued.
IV. The beta of the market portfolio is 1.
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