ADM Labs is a publicly owned company with several issues of capital stock outstanding. Over the past decade, the company has consistently earned modest profits and has increased its com-mon stock dividend annually by 5 or 10 cents per share. Recently the company introduced several new products that you believe will cause future sales and profits to increase dramatically. You alsoexpect a gradual increase in long-term interest rates from their present level of about 11 percent to,perhaps, 12 percent to 121⁄4 percent.InstructionsOn the basis of these forecasts, explain whether you would expect to see the market prices of thefollowing issues of ADM capital stock increase or decrease. Explain your reasoning in each answer.a. 10 percent, $100 par value preferred stock (currently selling at $90 per share).b. $5 par value common stock (currently paying an annual dividend of $2.50 and selling at $40per share).c. 7 percent, $100 par value convertible preferred stock (currently selling at $125 per
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.
ADM Labs is a publicly owned company with several issues of capital stock outstanding. Over
the past decade, the company has consistently earned modest profits and has increased its com-
mon stock dividend annually by 5 or 10 cents per share. Recently the company introduced several
new products that you believe will cause future sales and profits to increase dramatically. You also
expect a gradual increase in long-term interest rates from their present level of about 11 percent to,
perhaps, 12 percent to 121⁄4 percent.
Instructions
On the basis of these
following issues of ADM capital stock increase or decrease. Explain your reasoning in each answer.
a. 10 percent, $100 par value
b. $5 par value common stock (currently paying an annual dividend of $2.50 and selling at $40
per share).
c. 7 percent, $100 par value convertible preferred stock (currently selling at $125 per
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