You are considering purchasing a stock with a $100 per year dividend and expected price in two years of $500. Your personal required return is 15%. This is only two periods, so do not drop out the expected selling price as you would for a long holding period. (a) What is your personal willingness to pay for this stock? (b) The current market price of this stock is $600. Should you buy it? (c) Now keep the current market price, expected price, holding period, and personal required return constant. Solve for the break-even dividend (e.g. the dividend at which you are indifferent between buying and not buying the stock today) assuming the dividend is constant over time. (d) Now assume everyone know that the initial dividend in t + 1 is $120. What is the growth rate necessary in the Gordon model for you to buy the stock? (e) Finally, assume you buy the stock at the price and conditions you found in part (a) and sell it at $500. What is your rate of return?
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 are considering purchasing a stock with a $100 per year dividend and expected price in two years of $500. Your personal required return is 15%. This is only two periods, so do not drop out the expected selling price as you would for a long holding period.
(a) What is your personal willingness to pay for this stock?
(b) The current market price of this stock is $600. Should you buy it?
(c) Now keep the current market price, expected price, holding period, and personal required return constant. Solve for the break-even dividend (e.g. the dividend at which you are indifferent between buying and not buying the stock today) assuming the dividend is constant over time.
(d) Now assume everyone know that the initial dividend in t + 1 is $120. What is the growth rate necessary in the Gordon model for you to buy the stock?
(e) Finally, assume you buy the stock at the price and conditions you found in part (a) and sell it at $500. What is your rate of return?
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