The most recent financial data for the Rare Watts disclose the following: Dividend per share Sh.3.00 Expected annual dividend growth rate 6% Current required rate of return 15% The company is considering a variety of proposals in order to redirect the firm’s activities. The following four alternatives have been suggested: Do nothing in which case the key financial variables will remain unchanged. Invest in venture that will increase the dividend growth rate to 7% and lower the required rate of return to 14%. Eliminate an unprofitable product line. The action will increase the dividend growth rate to 8% and raise the required rate of return to 17%. Acquire a subsidiary operation from another company. This action will increase the dividend growth rate to 9% and required rate of return to 18%. For each of the proposed actions, determine the resulting impact price and recommend the best alternative
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 most recent financial data for the Rare Watts disclose the following:
- Dividend per share Sh.3.00
- Expected annual
dividend growth rate 6% - Current required
rate of return 15%
The company is considering a variety of proposals in order to redirect the firm’s activities. The following four alternatives have been suggested:
- Do nothing in which case the key financial variables will remain unchanged.
- Invest in venture that will increase the dividend growth rate to 7% and lower the required rate of return to 14%.
- Eliminate an unprofitable product line. The action will increase the dividend growth rate to 8% and raise the required rate of return to 17%.
- Acquire a subsidiary operation from another company. This action will increase the dividend growth rate to 9% and required rate of return to 18%.
For each of the proposed actions,
- determine the resulting impact price and recommend the best
alternative
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