Suppose that you are working as a financial analyst in an investment bank. Your client is seeking your advice to invest in either Stock A or Stock B given the market conditions in the coming year. Stock A is expected to yield a return of 35% if the market experiences a boom and a return of 5% if the market experiences a bust. Stock B is expected to yield a return of 65% if the market experiences a boom and a return of 15% if the market experiences a bust. According to your estimates, there is a 60% probability that the market will experience a boom and a 40% probability that the market will experience a bust. Calculate the expected return for each stock. Which stock would you advise your client to invest in if her/her objective is to maximize returns regardless of the level of risk?
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.
Step by step
Solved in 2 steps
