The dividend discount model is used by most equity analysts to determine a stock’s intrinsic value. The most popular of the models is the two-stage constant growth model. What is the rationale for valuing a firm using the two-stage dividend discount model versus other valuation methods?
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- A dividend valuation model such as the following is frequent. where: Pi = the current price of Common Stock i D1 = the expected dividend in Period 1 ki = the required rate of return on Stock i gi = the expected constant-growth rate of dividends for Stock i Identify the three factors that must be estimated for any valuation model, and explain why these estimates are more difficult to derive for common stocks than for bonds . Explain the principal problem involved in using a dividend valuation model to value: (1) companies whose operations are closely correlated with economic cycles. (2) companies that are of very large and mature. (3) companies that are quite small and are growing rapidly.When is it appropriate to use the dividend valuation models, such as the Zero Growth Model, constant growth model and variable growth model, in estimating the price of a stock?Apart from using PE ratio, what is another way of valuing the stock price? if we have the EPS, Share Price, Dividend Per Share, ROE and the discount rate (R). And what are the assumptions and the limitations of this model? What can be said about the dividend growth model? Similarly what can be said about the capital asset pricing model?
- “The constant-growth model should not be used with just any stock.” Explain with reasons the assumptions used by analysts when using the constant- growth dividend model.Which of the following is the best reason why the price-earnings method is often used by investors to estimate the fair price of a stock? a) Because the earning multiples are easily found in online financial databases. b) Earnings per share is a known amount that is related to the payment of future dividends. c) Because the price-earnings method gives the same answer as the constant growth method and is easier to compute. d) The price-earnings method has been shown to provide the most accurate price estimate.Explain the effect of D/E on asset returns, equity returns (assuming that cost of debt is not affected), asset beta and equity beta (assuming that debt beta is zero). Should an investor choose to invest in a stock of a company with high or low D/E, or why expected returns on these stocks are equivalent, although they are not equal?
- The dividend growth model of stock evaluation relies on several assumptions that might not be true in the real world. What are they?Compare and contrast constant growth model and zero growth model in stock valuation. Support your answer with examples.To estimate the required rate of return on a stock we can use the Capital Asset Pricing Model (CAPM) or the Discount Dividends Model. How we can decide which model to use? Explain.
- Which of the following will increase the price of a stock? Group of answer choices: A. Decrease in the required rate of return B. Decrease in the dividend growth rate C. Delay in the payment of dividends D. Decrease in earnings growthFor the following stock investment, find (a) the total purchase price, (b) the total dividend amount, (c) the capital gain or loss, (d) the total return, and (e) the percentage return. Ignore broker and SEC fees. (a) What is the total purchase price? $ (b) What is the total dividend amount? (c) What is the capital gain or loss? (d) What is the total return on investment? (e) What is the percentage return? (Round to the nearest percent.) Number of shares Purchase price per share Dividend per share Sale price per share 70 $40 $2 $82multible choice, In applying the constant-growth dividend model, increasing the market capitalization rate will cause a stock’s intrinsic value to? why? decrease increase remain unchanged. decrease or increase, depending upon other factors.
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