Question one The rate of return on Treasury Bills (a risk free asset) is 5% p.a. over the next three months. The expected rate of retum on the FT All Share Index portfolio over the same period is 8% p.a. An investment trust portfolio has a beta of 1.2 and an expected rate of dividend yield of 4% p.a. What might be the expected rate of capital growth of the investment trust portfolio? Question two The rate of return on treasury bills (a risk free asset) is 4% p.a. The expected retum on the FT All Share index portfolio is 9% p.a. Stocks A and B both have anticipated (forecast) retuns of 10% p.a. and a price of 100p. Stock A has a beta of 0.8 and stock B has a beta of 1.7. Are these shares mispriced? If so, should they be bought or sold? Question three The share price of a company is 200p. Its expected next dividend is 5p. The dividend (and share price) growth rate is expected to be 4% p.a. The risk-free interest rate is 4.5% p.a. The share has a beta of 1.2 and the expected rate of return on the stock market as a whole is 8.5% p.a. (a) Estimate the expected (forecast) rate of return on the share. (b) Estimate the required rate of return. (c) Consider whether the share is suitable for purchase.
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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