You are considering buying stock of a particular company. Your plan is to buy the stock today, receive dividend payments exactly one year from now, receive dividend payments again exactly two years from now, and immediately after receiving dividends in the second year, you would sell the stock. You paid a professional to perform fundamental analysis on the company, and you receive the following information based on that analysis: 1. expected dividend payment for one share one year from now: $21 2. expected dividend payment for one share two years from now: $34 3. expected sale price of one share of stock two years from now: $340 You may assume there is no inflation. If the prevailing interest rate is 7%, at what price would you consider a share of this company to be fairly valued today? (If necessary, round your answer to the nearest integer)
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.
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