In: Finance
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)
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.