Two years ago the Webster Corporation paid a dividend of D-2 = $8.00 and has just paid a dividend of D0 = $7.22. If the dividend growth rate implicit in these two dividend amounts has been constant and is expected to remain constant for the foreseeable future, determine this constant growth rate, g. If Webster’s equity β = 1.2, the expected return on the market, E[RM] = 12%, and the risk-free rate, RF = 7%, calculate the required return , kC/S, for Webster Corporation stock. Use the information in parts (A) and (B) to determine the current price, P0, of Webster Corporation’s stock. What dividend yield and capital gain is Webster stock offering?
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.
- (Stock Valuation Problem 2)
Two years ago the Webster Corporation paid a dividend of D-2 = $8.00 and has just paid a dividend of D0 = $7.22.
- If the
dividend growth rate implicit in these two dividend amounts has been constant and is expected to remain constant for the foreseeable future, determine this constant growth rate, g. - If Webster’s equity β = 1.2, the expected return on the market, E[RM] = 12%, and the risk-free rate, RF = 7%, calculate the required return , kC/S, for Webster Corporation stock.
- Use the information in parts (A) and (B) to determine the current price, P0, of Webster Corporation’s stock.
- What dividend yield and
capital gain is Webster stock offering?
Dividend Yield__________ Capital Gain__________
- What will Webster Corporation’s common stock value be in 10 years?
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