Question 3 The shares of SAD plc are trading at 210p and the company’s dividends are expected to grow at 5 per cent indefinitely into the future, where the required rate of return on the company’s shares is 15 per cent, and the share price can be explained by the constant rate of growth of dividends model. Hence, a) By determining the dividend expected in the next time period, mention how much of the share price of SAD can be
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.
Question 3
The shares of SAD plc are trading at 210p and the company’s dividends are expected to grow at 5 per cent indefinitely into the future, where the required
Hence,
a) By determining the dividend expected in the next time period, mention how much of the share price of SAD can be attributed to the future growth prospects of the company and how much to its existing assets, if the company finances all of its investments from retentions and the company pays out 75 per cent of its earnings as dividends.
b) By explaining what determines that rate of growth of dividends according to the constant rate of growth of dividends model, discuss what is meant by a price earnings (P/E) ratio and its primary determinants.
The 12-month trailing P/E ratio of Netflix is 91.51 while that of Goldman Sachs is 10.02.
c) Using the above information, try to analyse this difference in the context of the primary determinants in length.
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