VR-X issued 100,000 common stocks at par value of $12 to expand its business 3 years ago specialized in interior design services. The company has just paid a dividend of $2 per share and predicts for dividend cuts because of the coronavirus pandemic. The dividends are expected to decrease at an annual rate of 20 percent for the next two years. Afterwards, the company is confident that the dividend will be in rebound and stabilize at a constant growth rate of 8 percent in the foreseeable future. VR-X’s common stock has a beta of 1.25. The risk-free rate is 4 percent and the market risk premium is 7 percent. (a) Calculate the required return on VR-X common stock based on capital pricing model. (CAPM) (b) Calculate the dividend amounts in 1, 2 and 3 years respectively (D1, D2 and D3). (c) Based on parts (a) and (b), calculate the current common stock price. (please show me steps and round the final answer to 2 decim
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.
VR-X issued 100,000 common stocks at par value of $12 to expand its business 3 years ago specialized in interior design services. The company has just paid a dividend of $2 per share and predicts for dividend cuts because of the coronavirus pandemic. The dividends are expected to decrease at an annual rate of 20 percent for the next two years. Afterwards, the company is confident that the dividend will be in rebound and stabilize at a constant growth rate of 8 percent in the foreseeable future.
VR-X’s common stock has a beta of 1.25. The risk-free rate is 4 percent and the market risk premium is 7 percent.
(a) Calculate the required return on VR-X common stock based on capital pricing model. (
(b) Calculate the dividend amounts in 1, 2 and 3 years respectively (D1, D2 and D3).
(c) Based on parts (a) and (b), calculate the current common stock price.
(please show me steps and round the final answer to 2 decimal places, thanks)
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