Tel-Talk Inc. is a company that provides domestic and international long distance, regional and local communications services, cable (broadband) television, and Internet communications services. For the past two years, it has paid an annual dividend of $2.31 per share; however, the compound rate of growth in dividends per share over the past 10 years has been 6.2 percent. The beta of Tel-Talk stock measured over the past three years is 1.10. Its debt, which makes up 32 percent of total capital, currently yields 7.28 percent, while long term Treasury bonds are yielding 5.63 percent. The market risk premium (geometric) is at 5.9 percent. Tel-Talk shares are currently trading at $46.25 per share. Calculate Tel-Talk's cost of equity using: a) the Capital Asset Pricing Model (CAPM), and b) the dividend growth model (look up the constant-growth dividend model if you don’t recall it). c) Which method would you prefer and why?
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.
Tel-Talk Inc. is a company that provides domestic and international long distance, regional and local communications services, cable (broadband) television, and Internet communications services. For the past two years, it has paid an annual dividend of $2.31 per share; however, the compound rate of growth in dividends per share over the past 10 years has been 6.2 percent. The beta of Tel-Talk stock measured over the past three years is 1.10. Its debt, which makes up 32 percent of total capital, currently yields 7.28 percent, while long term Treasury bonds are yielding 5.63 percent. The market risk premium (geometric) is at 5.9 percent. Tel-Talk shares are currently trading at $46.25 per share.
Calculate Tel-Talk's
a) the
b) the dividend growth model (look up the constant-growth dividend model if you don’t recall it).
c) Which method would you prefer and why?
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