You want to value the company Marks and Spencer Group Plc. You project the dividends over 10 years as shown in the picture below: You expect a resale price in 10 years at £360. Based on the risk of the company, you require a rate of return on equity of 7.5%. Using the DDM, calculate the price of the company today. Instead of a final resale price of £360, you now forecast a long-run growth rate of 4.2%. Using the Gordon-Shapiro model only , calculate the price of Mark and Spencer. Using the forecasted dividend values for the first ten years and the long-run growth rate after that, calculate the present stock value. You now predict a medium growth rate of 6% from years 10 to 15 and a long-run growth rate of 4.2% after year 15. Using the forecasted dividend values for the first ten years, the medium-term growth rate from years 11 to 15 and the long-run growth rate after that, calculate the present stock value. Compare the different results. Find the current stock price of Mark and Spencer and decide what do you do (i.e. buy or sell), using the prediction of each model. Write a short text to reflect on the different models, their hypotheses, and their consequences on the pricing of the company.
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.
You want to value the company Marks and Spencer Group Plc. You project the dividends over 10 years as shown in the picture below:
You expect a resale price in 10 years at £360. Based on the risk of the company, you require a rate of
- Using the
DDM , calculate the price of the company today.
Instead of a final resale price of £360, you now
- Using the Gordon-Shapiro model only , calculate the price of Mark and Spencer.
- Using the forecasted dividend values for the first ten years and the long-run growth rate after that, calculate the
present stock value.
You now predict a medium growth rate of 6% from years 10 to 15 and a long-run growth rate of 4.2% after year 15.
- Using the forecasted dividend values for the first ten years, the medium-term growth rate from years 11 to 15 and the long-run growth rate after that, calculate the present stock value.
- Compare the different results. Find the current stock price of Mark and Spencer and decide what do you do (i.e. buy or sell), using the prediction of each model.
- Write a short text to reflect on the different models, their hypotheses, and their consequences on the pricing of the company.
Step by step
Solved in 8 steps with 6 images
