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 following table gives Foust Company’s earnings per share for the last 10 years.
The common stock, 7.8 million shares outstanding, is now (1/1/19) selling for $65.00 per
share. The expected dividend at the end of the current year (12/31/19) is 55% of the 2018
EPS. Because investors expect past trends to continue, g may be based on the historical
earnings growth rate. (Note that 9 years of growth are reflected in the 10 years of data.)
The current interest rate on new debt is 9%; Foust’s marginal tax rate is 40%, and its target
capital structure is 40% debt and 60% equity.
a. Calculate Foust’s after-tax cost of debt and common equity. Calculate the
as rs = D1/P0 + g.
b. Find Foust’s WACC.
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