The stock of company X currently trades at £58.00. The risk-free interest rate is 5% per annum. Consider a forward written on the stock with a maturity of 6 months. The company will pay a dividend of £5.00 shortly before the maturity of the forward. The no-arbitrage forward price is closest to: A. £54.40 B. £55.90 C. £58.00 D. £59.40
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.
QUESTION 36
The stock of company X currently trades at £58.00. The risk-free interest rate is 5% per annum. Consider a forward written on the stock with a maturity of 6 months. The company will pay a dividend of £5.00 shortly before the maturity of the forward. The no-arbitrage forward price is closest to:
A. £54.40
B. £55.90
C. £58.00
D. £59.40
QUESTION 37
Which of the following statements is most accurate?
A. It is never optimal to exercise an American call option on an index early
B. It is never optimal to exercise an American put option on gold early
C. It is never optimal to exercise an American put option on a currency early
D. None of the above
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