Vincent Nguyen, an analyst, is examining the stock of British Airways (London Stock Exchange: BAY) as of the beginning of 2008. He noticed that the concensus forecast by analyst is that the stock will pay £4 dividend per share in 2009 (based on 21 analyst) and £5 dividend in 2010 (based on 10 analysts). Nguyen expects the price of the stock at the end of 2010 to be £250. He has estimated that the required rate of return on the stock is 11%. Assume all dividends are paid at the end of the year. Required: (a) Using the DDM, estimate the value of BAY stock at end of 2009. (b) Using the DDM, estimate the value of BAY stock at end of 2008.
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.
Vincent Nguyen, an analyst, is examining the stock of British Airways (London Stock Exchange: BAY) as of the beginning of 2008. He noticed that the concensus
Required: (a) Using the
(b) Using the DDM, estimate the value of BAY stock at end of 2008.
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