You are analyzing Jillian's Jewlery (JJ) stock for a possible purchase. JJ just paid a dividend of $1.50 yesterday. You expect the dividend to grow at the rate of 6% per year for the next 3 years; if you buy the stock, you plan to hold it for 3 years and then sell it. a. What dividends do you expect for JJ stock over the next 3 years? In other words, calculate D1, D2, and D3. Note that D0 = $1.50. b. JJ's stock has a required return of 13% and so this is the rate you'll use to discount dividends. Find. the present value of the dividend stream; that is, calculate the PV Of D1, D2, and D3, and then sum these PVs. c. JJ stock should trade for $27.05 3 years from now (i.e., you expect P3 = $27.05). Discounted at a 13% rate, what is the present value of this expected future stock price? In other words, calculate the PV of $27.05
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 analyzing Jillian's Jewlery (JJ) stock for a possible purchase. JJ just paid a dividend of $1.50 yesterday. You expect the dividend to grow at the rate of 6% per year for the next 3 years; if you buy the stock, you plan to hold it for 3 years and then sell it.
a. What dividends do you expect for JJ stock over the next 3 years? In other words, calculate D1, D2, and D3. Note that D0 = $1.50.
b. JJ's stock has a required return of 13% and so this is the rate you'll use to discount dividends. Find. the present value of the dividend stream; that is, calculate the PV Of D1, D2, and D3, and then sum these PVs.
c. JJ stock should trade for $27.05 3 years from now (i.e., you expect P3 = $27.05). Discounted at a 13% rate, what is the present value of this expected future stock price? In other words, calculate the PV of $27.05.
d. If you plan to buy the stock, hold it for 3 years, and then sell it for $27.05, what is the most you should pay for it?
e. Use the constant growth model to calculate the present value of this stock Assume that g = 6% and is constant.
f. Is the value of this stock dependent on how long you plan to hold it? In other words, if your planned holding period were 2 years or 5 years rather than 3 years, would this affect the value of the stock today, P0? Explain your answer.
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