Question

The dividend discount model can be simply stated as the stock is worth the total of all the future dividend payments, discounted back to their present value. Select a publicly traded stock of a multinational enterprise. Calculate the value of the stock using the dividend discount model. Show you calculations and discuss any assumptions you used in this calculation, such as growth. Compare your calculation to the current price of the stock. Is the stock currently trading at, above, or below your value calculation? Research and analyze why the stock may be trading at that value. Would you purchase this stock? Why or why not.

Answer 1

Company chosen = Apple

All the assumptions such as growth rate, discount rate have been discussed in the calculation and mentioned in the image above.

As per the calculation, the stock is currently trading above its intrinsic value.

Due to the current condition of the pandemic, the stock has corrected more than 20% in the last couple of months and this has happened because due to the ongoing scenario, the company's operations for the coming quarters may get hamper which will ultimately have a negative impact on its annual performance. As it has become difficult for the investors to understand when the market and the mentioned stock will bottom out and until when the effects of the current virus will last in the market, they are finding the equity class as a risky investment instrument. Apart from this, the mobile industry has become more competitive and has negatively impacted the company's sales growth over the past years which has made the stock lose its premium value to some extent.

Given the intrinsic value derived from the mentioned valuation method, it appears like the stock is still overvalued and it would be rational for an investor to wait for a correction so that the investor could invest with a margin of safety. Hence, the stock should not be purchased now.