The current dividend, D0, of the stock of Sun Devil Corporation is $3 per share. Under present conditions, this dividend is expected to grow at a rate of 4 percent annually for the foreseeable future. The beta of Sun Devil stock is 1.4. The risk-free rate of return is 7 percent, and the expected market rate of return is 13 percent. Round your answers to the nearest cent. At what price would you expect Sun Devil common stock to sell? $ If the risk-free rate of return declines to 5 percent, what will happen to Sun Devil’s stock price? (Assume that the expected market rate of return remains at 13%, the dividend growth rate remains at 4%, and D0 remains at $3.) $ Sun Devil’s management is considering acquisitions in the machine tool industry. Management expects the firm’s beta to increase to 1.6 as a result of these acquisitions. The dividend growth rate is expected to increase to 6 percent annually. Would you recommend this acquisition program to management? (Assume the same initial conditions that existed in part a.) Based on stock price of $ , the acquisition program be recommended.
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 current dividend, D0, of the stock of Sun Devil Corporation is $3 per share. Under present conditions, this dividend is expected to grow at a rate of 4 percent annually for the foreseeable future. The beta of Sun Devil stock is 1.4. The risk-free
- At what price would you expect Sun Devil common stock to sell?
$
- If the risk-free rate of return declines to 5 percent, what will happen to Sun Devil’s stock price? (Assume that the expected market rate of return remains at 13%, the
dividend growth rate remains at 4%, and D0 remains at $3.)
$
- Sun Devil’s management is considering acquisitions in the machine tool industry. Management expects the firm’s beta to increase to 1.6 as a result of these acquisitions. The dividend growth rate is expected to increase to 6 percent annually. Would you recommend this acquisition program to management? (Assume the same initial conditions that existed in part a.)
Based on stock price of $ , the acquisition program be recommended.
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