Peter plans to invest in the ordinary share of Queens Ltd which is trading at $12.00 currently. From her friends, she learnt that the company will have a dividend of $1.20 per share at the next payment. Thereafter, the dividend payments is projected to grow at a rate of 5% for another two years. From the fourth year onward, Queens Ltd will adopt a constant dividend growth policy of 4% annually. If the required rate of return for Peter is 10%, what is the intrinsic value of the share?
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.
Peter plans to invest in the ordinary share of Queens Ltd which is trading at $12.00 currently. From her friends, she learnt that the company will have a dividend of $1.20 per share at the next payment. Thereafter, the dividend payments is projected to grow at a rate of 5% for another two years. From the fourth year onward, Queens Ltd will adopt a constant dividend growth policy of 4% annually. If the required rate of return for Peter is 10%, what is the intrinsic value of the share?
Intrinsic value:
Intrinsic value denotes to an investor's view of the intrinsic worth of an asset, like a corporation, stock, option, or real estate. Realizing a stock's inherent worth is helpful for value investors who have an objective of purchasing stocks and other assets at a discount to this amount.
Intrinsic price is a measure of what an asset is value. This measure is reached at by means of an objective computation or complicated financial model, somewhat than utilizing the presently dealing market price of that asset.
The computation of dividend for year 4:
Hence, the 4th year dividend is $1.32.
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