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.
The Directors of BM Ltd have identified two existing established businesses that may be suitable to purchase to fulfil their expansion plans and have asked you to calculate and compare ratios for both companies before making a recommendation on which company to purchase.
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Income Statements for the Year Ended 31st Dec 2020 |
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|
KM Ltd |
ROW Ltd |
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|
£'000 |
£'000 |
||||
|
Sales revenue |
8,320 |
11,250 |
|||
|
Cost of sales |
(6,020) |
(9,030) |
|||
|
Gross profit |
2,300 |
2,220 |
|||
|
Operating expenses |
(1,048) |
(1,535) |
|||
|
Operating profit |
1,252 |
685 |
|||
|
Finance charges |
(20) |
(70) |
|||
|
Profit before tax |
1,232 |
615 |
|||
|
|
(62) |
(30) |
|||
|
Profit for the year |
1,170 |
585 |
|
SOFP (Balance Sheet) as at 31st Dec 2020 |
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|
KM Ltd |
ROW Ltd |
||||
|
£'000 |
£'000 |
£'000 |
£'000 |
||
|
Non-current assets |
502 |
198 |
|||
|
Current assets |
|||||
|
Inventory |
1,290 |
2,437 |
|||
|
Trade receivables |
730 |
1,990 |
|||
|
2,020 |
4,427 |
||||
|
Total assets |
2,522 |
4,625 |
|||
|
Equity |
|||||
|
Share capital |
1,350 |
800 |
|||
|
Reserves |
580 |
1,145 |
|||
|
1,930 |
1,945 |
||||
|
Current liabilities |
|||||
|
Trade payables |
430 |
850 |
|||
|
Taxation |
62 |
30 |
|||
|
Bank overdraft |
35 |
350 |
|||
|
527 |
1,230 |
||||
|
Non-current liabilities |
|||||
|
Loans |
65 |
1,450 |
|||
|
Total equity and liabilities |
2,522 |
4,625 |
You are required to:
- Use your Excel skills to calculate the following ratios for both companies.
- Gross profit margin
- Operating profit margin
Return on capital employed - Asset turnover
- Current ratio
- Acid test
- Inventory days
- Trade receivable days
- Trade payable days
- Working capital cycle/operating cycle
- Gearing
- Interest cover
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