Use the two-stage dividend growth model to value a stock, using the following information: The cost of equity is 13% (1) Dividends have been growing at an annual rate of 10% for the last five years and assume this growth rate will continue through the next 5 years, which is the first stage. The last dividend paid was $2.00. Calculate the expected dividend each year for years 1 - 5 and their present values. (2) Suppose that after year 5, the dividends are expected to grow at 2.5% (second-stage growth rate) per year, indefinitely. (3) Calculate today's stock price based on the above information.
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.
Use the two-stage dividend growth model to value a stock, using the following information:
The
(1) Dividends have been growing at an annual rate of 10% for the last five years and assume this growth rate will continue through the next 5 years, which is the first stage. The last dividend paid was $2.00. Calculate the expected dividend each year for years 1 - 5 and their
(2) Suppose that after year 5, the dividends are expected to grow at 2.5% (second-stage growth rate) per year, indefinitely.
(3) Calculate today's stock price based on the above information.
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