Case Analysis -How low can it go
1. The dividend discount model (DDM) is a procedure for valuing the price of a stock by using predicted dividends and discounting them back to present value; if the value obtained from the DDM is higher than what the shares are currently trading at, the stock is undervalued and vice versa. According to the DDM the price of the stock is
Po= Div1/ (r-g) where
Po= is the price of shares, Div1=Dividend next year, r= required rate of return, g=growth rate
Question 4
The pattern of past and future expected dividends would determine which model is applicable to a particular case.
The Two-Stage Model
The two-stage model assumes that the company will experience a period of high-growth followed by a decline to a stable growth period. The first issue to deal with is to estimate how long the high growth period should last. Should it be 5 years, 10 years, or maybe longer? Next the model makes an immediate transition from high growth to low growth which isn’t always realistic. The Gordon Growth Model
The Gordon growth model can be used to value a company (usually mature) that is in 'steady state' with dividends growing at a constant rate that can be sustained forever is a major assumption. model's greatest strength is its simplicity and is useful because it relies on inputs that are readily available or easy to estimate.
Value of Stock = D1 ke -g
Question #6
Companies can offer two classes of stock: common and preferred which represents units of ownership. The preferred and common stocks differ in their financial terms and voting/governance rights in the company. While corporate bond is a loan to a company which pays periodic interest payments. As a unit of ownership, common stock typically carries voting rights that can be exercised in corporate decisions. Preferred stock (also called preference shares or preferred shares) differs from common stock in that it typically does not carry voting rights but as a special equity instrument that has
Po= Div1/ (r-g) where
Po= is the price of shares, Div1=Dividend next year, r= required rate of return, g=growth rate
Question 4
The pattern of past and future expected dividends would determine which model is applicable to a particular case.
The Two-Stage Model
The two-stage model assumes that the company will experience a period of high-growth followed by a decline to a stable growth period. The first issue to deal with is to estimate how long the high growth period should last. Should it be 5 years, 10 years, or maybe longer? Next the model makes an immediate transition from high growth to low growth which isn’t always realistic. The Gordon Growth Model
The Gordon growth model can be used to value a company (usually mature) that is in 'steady state' with dividends growing at a constant rate that can be sustained forever is a major assumption. model's greatest strength is its simplicity and is useful because it relies on inputs that are readily available or easy to estimate.
Value of Stock = D1 ke -g
Question #6
Companies can offer two classes of stock: common and preferred which represents units of ownership. The preferred and common stocks differ in their financial terms and voting/governance rights in the company. While corporate bond is a loan to a company which pays periodic interest payments. As a unit of ownership, common stock typically carries voting rights that can be exercised in corporate decisions. Preferred stock (also called preference shares or preferred shares) differs from common stock in that it typically does not carry voting rights but as a special equity instrument that has