We use the dividend valuation model to value the price of the stock. As an investor...

We use the dividend valuation model to value the price of the stock. As an investor how do you get value by investing in a stock? Why does the stock valuation technique discussed in the module making sense to you or why not? What about the stock you invested never paid a dividend?

Expert Solution

As an investor I get value by investing in a stock in the form of capital gains that accrue to me when market price of the stock that I have invested in increases. Each stock has a fair value or an intrinsic value and the market price at which a stock is trading is not usually the same as the fair price but is either higher or lower than the fair price. When the market price is lower than the fair price the stock is said to be undervalued and hence there is an upside potential to it. In future, when the market price rise, the value of my holding increase. Additionally I get value by investing in a stock when the company pays regular dividends on the stock.

The stock valuation technique makes sense to me because value of an asset is equal to the present value of all future cash flows that can be generated from the asset. For equity holders in a company the stock held by them is an asset for them and they receive cash flows in the form of dividend payouts. Thus the amount that they will pay for this asset (i.e. the equity stock) would ideally be the present value of all the future dividends that they will receive on the stock.

In case the stock that I invested in never pays a dividend then the expected future cash flows will be the sale price of the stock. In essence what dividend discount model does is that it computes the present value of all future cash flows associated with a stock. Besides dividend the expected future sale price of a stock is also a future cash flow and this hold value to me as a stockholder. Suppose that I own a stock of GE which I can sell for $1,000 after a period of 20 years (assuming here that GE does not pay any dividends). The value of this stock will be the present value of $1,000 which is the expected future sale price of the stock.

jeff jeffy answered 2 years ago

In most valuation of stock prices, we use the DDM model, use the DDM to value...

In most valuation of stock prices, we use the DDM model, use the DDM to value a stock of your choice (Walmart ), show the work on your answer and explain what this shows of your chosen stock remenber to have a good logical arguments. Stock value = Dividend per Share / (discount rate - dividend growth rate)

Basic Stock Valuation: Dividend Growth Model The value of a share of common stock depends on...

Basic Stock Valuation: Dividend Growth Model The value of a share of common stock depends on the cash flows it is expected to provide, and those flows consist of the dividends the investor receives each year while holding the stock and the price the investor receives when the stock is sold. The final price includes the original price paid plus an expected capital gain. The actions of themarginal investor determine the equilibrium stock price. Market equilibrium occurs when the stock's...

Stocks and Their Valuation: Discounted Dividend Model The value of a share of common stock depends...

Stocks and Their Valuation: Discounted Dividend Model The value of a share of common stock depends on the cash flows it is expected to provide, and those flows consist of the dividends the investor receives each year while holding the stock and the price the investor receives when the stock is sold. The final price includes the original price paid plus an expected capital gain. The actions of the marginal investor determine the equilibrium stock price. Market equilibrium occurs when...

The Discounted Dividend Model assumes that the price of a stock is the present value of...

The Discounted Dividend Model assumes that the price of a stock is the present value of what? (5 points)

8. (A) True/False Explain: According to the basic stock valuation model, the value an investor assigns...

8. (A) True/False Explain: According to the basic stock valuation model, the value an investor assigns to a share of stock is dependent upon the length of time the investor plans to hold the stock. (B) True/False Explain: When markets exhibit semi-strong form efficiency, balance sheet information and other public information can be used to help forecast prices/returns, however past prices will be of no help. (C) True/False Explain: Many analysts correctly predicted that the stock market would decline in...

Why is it not feasible to use the dividend discount model in the valuation of a...

Why is it not feasible to use the dividend discount model in the valuation of a true growth company? Requirements: 250 words

Why might a stock dividend or a stock split be of limited value to an investor?...

Why might a stock dividend or a stock split be of limited value to an investor? - 5 points needed

Explain the dividend discount model as a basis for stock valuation, including a example in your...

Explain the dividend discount model as a basis for stock valuation, including a example in your initial post. What are the challenges of predicting future dividends, and what other factors affecting stock price are not accounted for in the dividend discount model?

Corporate valuation model The corporate valuation model, the price-to-earnings (P/E) multiple approach, and the economic value...

Corporate valuation model The corporate valuation model, the price-to-earnings (P/E) multiple approach, and the economic value added (EVA) approach are some examples of valuation techniques. The corporate valuation model is similar to the dividend-based valuation that you’ve done in previous problems, but it focuses on a firm’s free cash flows (FCFs) instead of its dividends. Some firms don’t pay dividends, or their dividends are difficult to forecast. For that reason, some analysts use the corporate valuation model. Charles Underwood Agency...

Using a dividend discount model, what is the price for this stock? Stock covariance with the...

Using a dividend discount model, what is the price for this stock? Stock covariance with the market= 0.5 Market variance = 0.25 Stock covariance with a second risk factor= 0.6 Variance of the second factor= 0.3 Market Premium:3% Second factor risk premium=1% Risk free rate =2 % Current earnings per share= $5, The ROE is expected to shrink (decrease) at the rate 10% for first 5 years The ROE is expected to grow at the rate 8% forever after the...

Question