A few years ago, Mark learned the same valuation methods that we studied in this unit. He decided to put his knowledge in practice and used the constant growth dividend discount model to value one company. Mark concluded that the company was undervalued and bought shares of the company. After a while, the company’s price did not move toward the value he found. As a matter of fact, contrary to what he expected, the price of the company went down. He finally cried: Oh, If I only knew the true value of the company, I would not have lost money! Why do you think Mark’s valuation did not work out well? Explain.
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.
A few years ago, Mark learned the same valuation methods that we studied in this unit. He decided to put his knowledge in practice and used the constant growth
After a while, the company’s price did not move toward the value he found. As a matter of fact, contrary to what he expected, the price of the company went down. He finally cried: Oh, If I only knew the true value of the company, I would not have lost money!
Why do you think Mark’s valuation did not work out well? Explain.
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