Question

In: Finance

Question 2 (a) You are asked to apply dividend growth model to estimate the price of...

Question 2


(a) You are asked to apply dividend growth model to estimate the price of Beautiful Life
Berhad given the next dividend per share of RM0.60. You are told that the required
rate of return is 13 percent and a projected constant growth rate of 8 percent for
Beautiful Life Berhad. Briefly describe four alternatives to stock common valuation.


(b) Describe pioneering and decline stages of industrial life cycle. As one of top
management members in your firm, what should you do if your firm is in pioneering
stage?


(Total: 20 marks)

Solutions

Expert Solution

Dividend growth rate model:

P0=D1/(Ke-g) [where, P0=present value of price of share, D1=Expected dividend=0.60, Ke= Rate of return=13%,    =0.60/(0.13-0.08)      g=growth rate=8%] =12

Alternatives to common stock valuation:

a) Dividend Discount Model: The DDM is based on the assumption that the company's dividend represent the company's cash flow to its shareholders.athe model states that the intrinsic value of the company's stock price equals the present value of the company's future dividends.

b) Discounted Cash Flow model: Under DCF approach the intrinsic value of a stock is calculated by discounting the company's free cash flows to its present value.

c) P/ BV: Book Value represents the money , the investor, would get if the company were to be liquidated. It is also called the company’s networth. So, essentially, the P/BV ratio represents how much money investor would pay for a stock for each rupee of the company’s assets. The P/BV ratio is most appropriate for companies in the banking and similar industries with high tangible assets.      

d)P/EG: The stock prices are linked to company’s growth. Yet, often the share prices jump at a faster rate than company’s profit growth. This often leads to gross mispricing. The stocks then correct and the prices plunge soon after. This is why analysts use the P/EG or Price to Earnings to Growth ratio, which compares the share prices to the company’s profit growth.


Related Solutions

You are asked to apply dividend growth model to estimate the price of Beautiful Life Berhad...
You are asked to apply dividend growth model to estimate the price of Beautiful Life Berhad given the next dividend per share of RM0.60. You are told that the required rate of return is 13 percent and a projected constant growth rate of 8 percent for Beautiful Life Berhad. Briefly describe four alternatives to stock common valuation.    do not write less 350 to 400 words
Discuss the limitations of Dividend Growth Model and the challenges you may find when you apply...
Discuss the limitations of Dividend Growth Model and the challenges you may find when you apply this model to real world stock valuation.
Using the constant growth dividend model, the growth in the stock price matches the growth rate...
Using the constant growth dividend model, the growth in the stock price matches the growth rate in dividends. True or False
Question 3. 1. A CFO says, “The dividend growth model implies that the current stock price...
Question 3. 1. A CFO says, “The dividend growth model implies that the current stock price equals the present value of future dividends. We thus increase dividend payouts rather than retaining earnings to maximize the stock price." Do you agree with the CFO? Justify your answer. (You do not have to criticize the dividend growth model but discuss the CFO's interpretation of the model.) 2. Regarding the CFO's statement above, a treasurer responds as follows: “I do not agree. Retained...
Dividend Growth Model
A company has just paid a dividend of $1.50 and it is expected to grow 6% per year for an indefinite period of time.  If the required rate of return on the stock is 12% What would you pay most for the stock?
QUESTION START a) Using the Dividend Discount Model (DDM), you estimate the intrinsic value of ABC...
QUESTION START a) Using the Dividend Discount Model (DDM), you estimate the intrinsic value of ABC Ltd is $7.50. If the constant dividend growth rate is 5% and the required rate of return is 9% per annum. Calculate the dividend per share paid by ABC Ltd today. b) ABC Ltd just announced that it is not expected to pay any dividends for the next 4 years. Then the expected dividend per share found in part (a) will be paid to...
Consider a 2 stage dividend growth model. in the first stage dividend grows at 10% per...
Consider a 2 stage dividend growth model. in the first stage dividend grows at 10% per year for 4 years. in the second stage starting year 5, dividend grows at the rate of 6% for ever. assuming D1= $4 and k=15%, find the fair value of the stock.
Explain the difference between using the zero-growth dividend valuation model and the constant-growth dividend valuation model...
Explain the difference between using the zero-growth dividend valuation model and the constant-growth dividend valuation model when finding the intrinsic value of common stock and preferred stock ? How does adding a growth rate to the valuation process affect the intrinsic value?
Explain the difference between using the zero-growth dividend valuation model and the constant-growth dividend valuation model...
Explain the difference between using the zero-growth dividend valuation model and the constant-growth dividend valuation model when finding the intrinsic value of common stock and preferred stock. How does adding a growth rate to the valuation process affect the intrinsic value?
Assume that you are using the dividend discount model (the Gordon Growth Model) to value stock....
Assume that you are using the dividend discount model (the Gordon Growth Model) to value stock. The stock currently pays no dividends, but expected to begin paying dividends in five years. The firm's cost of equity is 11%. Compute the value of a stock paying no dividends today, but that is expected to pay annual dividends of $4 in five years and the stock is expected to grow at a rate of 9% for the next six years that it...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT