The stock of Z-Tech Plc is currently selling for £10 per share. Earnings per share in the coming year are expected to be £1.50. The company has a policy of paying out 20% of its earnings each year in dividends. The rest is retained and invested in projects that earn a 7% internal rate of return per year. This situation is expected to continue indefinitely. a. Assuming the current market price of the stock reflects its intrinsic value as computed using the constant-growth DDM, what rate of return do Z-Tech’s investors require? b. By how much does Z-Tech’s stock price change if all its earnings are paid as dividends and nothing is reinvested? c. If the company were to increase its dividend payout ratio from 20% to 60%, what would happen to its stock price?
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 stock of Z-Tech Plc is currently selling for £10 per share. Earnings per share in the coming year are expected to be £1.50. The company has a policy of paying out 20% of its earnings each year in dividends. The rest is retained and invested in projects that earn a 7%
a. Assuming the current market price of the stock reflects its intrinsic value as computed using the constant-growth
b. By how much does Z-Tech’s stock price change if all its earnings are paid as dividends and nothing is reinvested?
c. If the company were to increase its dividend payout ratio from 20% to 60%, what would happen to its stock price?
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