The market capitalization rate on the stock of Aberdeen Wholesale Company is 10%. Its expected ROE is 12%, and its expected EPS is $5. If the firm's payout ratio is 70%, what is the value of the stock assuming a constant growth of dividends? Round your answer to two decimal places.
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 market capitalization rate on the stock of Aberdeen Wholesale Company is 10%. Its expected
In the given case, Expected ROE and firm's payout ratio is given . Retention ratio is calculated as 1- payout ratio .
Constant growth rate is calculated as ROE* Retention ratio .
Since , expected EPS is given , so expected dividend is calculated as the expected EPS * Payout ratio .
And, the market capitalization rate on the stock is already given . It is the cost of equity (Ke) .
Therefore,
We calculated the value of the stock using constant dividend growth model ,
Value of stock (P0) = Expected dividend / (market capitalization rate - constant growth rate)
Explanation:
Value of the stock is the current market price of a stock. It means if that stock is to be sold at today, then value of the stock is the current selling price .
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