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.
- You are interested in Speculative Holdings which is currently trading at a market price of R4.2 per share. You expect it to achieve earnings next year of R3,420,000 and project a dividend next year of R0.137 per share. The firm has 10 million shares in issue and you estimate that you would requires a return of 12% on this investment. What position would you take on Speculative Holdings?
- You have collected the following information regarding Impi Industrial Corporation’s historical earnings per share
|
2012 |
R 12.36 |
|
2013 |
R 13.60 |
|
2014 |
R15.82 |
|
2015 |
R 17.80 |
|
2016 |
R 20.90 |
|
2017 |
R21. 78 |
Based on your analysis of Impi’s fundamentals you estimate that the firm’s earnings will continue to grow at its average historical growth rate for the next year but that in the following year, as a result of the launch of a new product the firm is currently developing, earnings will grow at a rate of 20% per year for two years. After this, you project that the earnings growth rate will decrease by 5% per year for the next two years, to its long-term sustainable rate. You project that the firm will maintain a 50% dividend pay-out ratio and that the appropriate market capitalisation rate for Impi Industrial Corporation is 15%. What action would you take if the firm’s shares are currently trading at R620 per share?
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