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In: Finance

During the current crises of Covid-19 pandemic, stock prices of most of the companies are falling...

During the current crises of Covid-19 pandemic, stock prices of most of the companies are falling all over the world but some stock prices are falling more than others. Explain using dividend discount model why these stock prices are falling, also explain stocks of which sectors of the economy are being more affected, which are being less affected due to this Covid-19 pandemic. Is there any sector(s) that is benefiting from this crisis? Why are they benefiting?

Solutions

Expert Solution

Dividend discount model is a way of valuing a company based on the theory that a stock is worth the discounted sum of all of its future dividend payments. In other words, it is used to evaluate stocks based on the net present value of future dividends.

Dividend discount model prices a stock by adding its future cash flows discounted by the required rate of return that an investor demands for the risk of owning the stock

In the COVID-19 Scenerio when the operations of all the companies are halted due to the threat of infection, it may blur the going concern scenerio of the companies unless an untill any permanent cure for the virus is developed. Due to the loss in production of the organisations the a situation of economic recession is bit closer to the doorstep which may result in the fall of the market price of the shares, due to the scrapping in the production level (because of lower demand), unavailabilty of manpower etc.

In this Scenerio investors may not be able to estimate the future returns that these corporations will be generating, and hence Dividend Discount Model will will also result in the lower price of the shares.

Service industries, Manufacturing and FMCG other than neccessatiy goods are worstly impacted by this situation.

Since in the search of cure to this pandemic many pharmaceuticals companies are conducting research and trials, it may seem that it will be huge oppurtunity if they succed and returns from these companies will be higher than expected. hence as per the DDM the share prices of these companies may rise.


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