You are attempting to value a private firm with the following characteristics: The firm had net profits of $10 million. It did not pay dividends, but had depreciation allowances of $5 million and capital expenditures of $12 million in the most recent year. Working capital requirements were negligible. The earnings had grown 25% over the previous five years, and are expected to grow at the same rate over the next five years. The average beta of publicly traded firms, in the same line of business, is 1.15, and the average debt-equity ratio of these firms is 25%. (The tax rate is 40%.) The private firm is an all-equity-financed firm, with no debt. P/E = 18.90 + 0.0695 *Growth - 0.5082 Beta - 0.4262 Payout Estimate the appropriate PE ratio for this private firm using the regression.
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.
Q1:
Regression of Price to Earning ratios on growth rates, betas, and payout ratios for stocks listed on the in April 2021.
Thus a stock with an earnings growth rate of 20%, a beta of 1.15, and a payout ratio of 40% would have had an expected PE ratio of:
You are attempting to value a private firm with the following characteristics:
The firm had net profits of $10 million. It did not pay dividends, but had
The earnings had grown 25% over the previous five years, and are expected to grow at the same rate over the next five years.
The average beta of publicly traded firms, in the same line of business, is 1.15, and the average debt-equity ratio of these firms is 25%. (The tax rate is 40%.) The private firm is an all-equity-financed firm, with no debt.
P/E = 18.90 + 0.0695 *Growth - 0.5082 Beta - 0.4262 Payout
Estimate the appropriate PE ratio for this private firm using the regression.
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