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 vaccine that will protect against Helicobacter pylori, a bacteria that causes a number of
diseases in the stomach. It is expected that Sinclair Pharmaceuticals will experience
extremely high growth over the next three years and will reinvest all of its earnings in
expanding the company over this time. Earnings were $1.20 per share before completion
of the development of the vaccine and are expected to grow by 40% per year for the next
three years. After this time, its expected growth will drop to 5% and stay there for the
foreseeable future. Four years from now Sinclair will pay dividends that are 75% of its
earnings from there on forever.
Question: If the equity discount rate is 10% per year, what is the value of a share of
Sinclair Pharmaceuticals today?
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