Question 1 Sisters Corp. pays a current (annual) dividend of $5, and dividends thereafter are expected to grow at the constant rate of 5% per year. The risk-free rate is 5%, and the expected return on the market portfolio is 15%. The stock has a beta of 0.50. The two competitors of Sisters Corp. are Brothers Corp. and Daughters Corp.. Brothers Corp. has a stock price of $80.00 and the earnings per share (EPS) of $5.00. Daughters Corp. has a stock price of $60.00 and the earnings per share (EPS) of $3.00. Sisters Corp. has expected EPS of $6 next year. Required: a) What is the market capitalization rate of the stock of Sisters Corp. (i.e., the expected return on this share)? b) What is the intrinsic value of the stock of Sisters Corp. using dividend discount model? What recommendation (buy, sell, hold) would you make to the investors? c) What is the intrinsic value of the stock of Sisters Corp. using price to earnings ratios model? What recommendation (buy, sell, hold) would you make to the investors?
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.
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