Chrisine Looks for a Way to Invest Her Newfound Wealth Christine Norton-Hines is a young Hollywood writer who is well on her way to television superstardom. After writing several successful television specials, she was recently named the head writer for one of TV's top- rated sitcoms. Christine fully realizes that her business is a fickle one and, on the advice of her dad and manager, has decided to set up an investment program. Christine will earn about a half-million dollars this year. Because of her age, income level, and desire to get as big a bang as possible from her investment dollars, she has decided to invest in speculative, high- growth stocks. Christine is currently working with a respected Beverly Hills broker and is in the process of building up a diversified portfolio of speculative stocks. The broker recently sent her information on a hot new issue. She advised Christine to study the numbers and, if she likes them, to buy as many as 1,000 shares of the stock. Among other things, corporate sales for the next 3 years have been forecasted as follows: Year Sales ($ in millions) 1 22.5 35.0 3 50.0 The firm has 2.5 million shares of common stock outstanding. They are currently being traded at $70 a share and pay no dividends. The company has a net profit rate of 20%, and its stock has been trading at a P/E of around 40 times earnings. All these operating characteristics are expected to hold in the future.
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. Compute the company's net profits & EPS for each of the next 3 years
b. compute the price of the stock 3 years from now.
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