Zincon Industries has a beta of 1.45. The risk-free rate is 8 percent and the expected return on the market portfolio is 14 percent. The investors required rate of return is 15%. The company currently pays a dividend of $2 a share, and investors expect it to experience a growth in dividends of 10 percent per annum for many years to come. a. What is the stock’s required rate of return using CAPM? b. What is the stock’s present market price per share, assuming this required return? c. What would happen to the required return and to market price per share if the beta were 0.80? (Assume that all else stays the same.)
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.
Zincon Industries has a beta of 1.45. The risk-free rate is 8 percent and the expected return
on the market portfolio is 14 percent. The investors required
currently pays a dividend of $2 a share, and investors expect it to experience a growth in dividends of 10 percent per annum for many years to come.
a. What is the stock’s required rate of return using CAPM?
b. What is the stock’s present market price per share, assuming this required return?
c. What would happen to the required return and to market price per share if the beta were 0.80?
(Assume that all else stays the same.)
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