The current share price of Blueberry plc is 205p. It has a policy of paying out 50% of earnings in dividends each year. The earnings history of the firm is as follows: Recently reported One year ago Two years ago Three years ago Four years ago Five years ago 14p 13p 12p 11p 10p 9p The rate of growth in earnings and dividends shown in the past is expected to continue into thefuture. The risk-free rate of returnis 6.5% and the risk premium on the averageshare has been 5% for decades. Blueberry is in a highersystematic risk class than theaverage share and therefore the riskpremium needs to beadjusted by a beta factor of 1.2. Required: 1. Use P/E module to decide whether Blueberry share's price is under- or over-priced 2. Use the Dividend Discount Model to value Blueberry's share. (c) Why is it more difficult to value a private company rather than public company?
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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