Suppose the price of CANNIBAL WEED (CW) Inc. closes at $69 on October 16, 2018 after the announcement that an extraordinary dividend of $3 per share will be distributed on October 17, 2018 before trading starts. (a) Based on this information, what price would you expect the stock to trade at on October 17 after the dividend has been distributed? (b) Based on your answer to part (a), what is the return for an investor that buys the stock just before the closing on October 16 and sells it again immediately after trading starts on October 17? Explain your answer. (c) Suppose the opening price for the stock on October 17, the day cannabis has been legalized, is $64. Is the stock efficiently price?
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 the price of CANNIBAL WEED (CW) Inc. closes at $69 on October 16, 2018 after the announcement that an extraordinary dividend of $3 per share will be distributed on October 17, 2018 before trading starts.
(a) Based on this information, what price would you expect the stock to trade at on October 17 after the dividend has been distributed?
(b) Based on your answer to part (a), what is the return for an investor that buys the stock just before the closing on October 16 and sells it again immediately after trading starts on October 17? Explain your answer.
(c) Suppose the opening price for the stock on October 17, the day cannabis has been legalized, is $64. Is the stock efficiently price?
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