Delphi Products Corporation currently pays a dividend of $2 per share, and this dividend is expected to grow at 15% percent annual rate for many years to come. The corporation has found an index of systematic risk of 1.60. Short-term Treasury securities rate is 10% and the expected return on the market portfolio is 14%. What will happen to the intrinsic value per share? If the stock is currently selling for $187, is this stock overvalued or undervalued and why?
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.
Delphi Products Corporation currently pays a dividend of $2 per share, and this dividend is expected to grow at 15% percent annual rate for many years to come. The corporation has found an index of systematic risk of 1.60. Short-term Treasury securities rate is 10% and the expected return on the market portfolio is 14%. What will happen to the intrinsic value per share? If the stock is currently selling for $187, is this stock overvalued or undervalued and
why?
NOTE: PLEASE SHOW HOW YOU COMPUTE EACH OF THE ITEMS.
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