The current price of Gold plc is 154p. It has a policy of paying out 45 per cent of earnings in dividends each year. The earnings history of the firm is as follows: EPS Last reported 10p One year ago 10p Two years ago 9p Three years ago 8p Four years ago 7p Five years ago 7p The rate of growth in earnings and dividends is expected to continue into the future. The risk-free rate of return is 5.5 per cent and market return is 8.5 per cent. The beta of Gold plc is 1.3. Required: Use the forward-looking price-earnings ratio to decide whether the shares at 305p are over- or under-priced.
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.
The current price of Gold plc is 154p. It has a policy of paying out 45 per cent of earnings in dividends each year. The earnings history of the firm is as follows:
|
EPS |
|
|
Last reported |
10p |
|
One year ago |
10p |
|
Two years ago |
9p |
|
Three years ago |
8p |
|
Four years ago |
7p |
|
Five years ago |
7p |
The rate of growth in earnings and dividends is expected to continue into the future. The risk-free
Required:
- Use the forward-looking price-earnings ratio to decide whether the shares at 305p are over- or under-priced.
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