Suppose Mwanga holds a stock security paying dividend of D0 = K2000 per year and his security is trading in the market where the interest rate is 10%. If dividend on his security is set to grow at a rate of 8% per annum; find: The expected dividend streams for the next 3 years. The present values of the dividends given in (a). What is the intrinsic value of Mwanga’s stock?
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.
Suppose Mwanga holds a stock security paying dividend of D0 = K2000 per year and his security is trading in the market where the interest rate is 10%. If dividend on his security is set to grow at a rate of 8% per annum; find:
- The expected dividend streams for the next 3 years.
- The
present values of the dividends given in (a). - What is the intrinsic value of Mwanga’s stock?
- What is the expected market price of Mwanga’s stock, one year from now?
As per honor code of Bartleby we are bound to give the answer of first three sub part, please post the remaining question separately, our remaining expert will assist you on that.
Intrinsic value of Stock can be computed using the formula given below.
Intrinsic Value = D1/ (Ke-g)
Here D1= Expected Dividend paid in next year
Ke = Cost of Capital (Interest Rate)
g = growth Rate
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