The Baron Basketball Company (BBC) earned $10 a share last year and paid a dividendof $6 a share. Next year, you expect BBC to earn $11 and continue its payout ratio. Assumethat you expect to sell the stock for $132 a year from now. If you require 12 percenton this stock, how much would you be willing to pay for it?a) Given the expected earnings and dividend payments, if you expect a sellingprice of $110 and require an 8 percent return on this investment, how much would you pay for the BBC stock?b). Over the long run, you expect dividends for BBC to grow at 8 percent and you require 11 percent on the stock. Using the infinite period DDM, how much would you pay for this stock?
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 Baron Basketball Company (BBC) earned $10 a share last year and paid a dividend
of $6 a share. Next year, you expect BBC to earn $11 and continue its payout ratio. Assume
that you expect to sell the stock for $132 a year from now. If you require 12 percent
on this stock, how much would you be willing to pay for it?
a) Given the expected earnings and dividend payments, if you expect a selling
price of $110 and require an 8 percent return on this investment, how much would you pay for the BBC stock?
b). Over the long run, you expect dividends for BBC to grow at 8 percent and you require 11 percent on the stock. Using the infinite period
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