{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Ch.6. Stock Valuation - Lecture Summary

Ch.6. Stock Valuation - Lecture Summary - Ch.5 Stock...

Info icon This preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Ch.5. Stock Valuation – Lecture Summary Dividend Yield – a measure of return for a stock (equity) investment where: Dividend Yield (DY) = annual dividend payment (DIV) stock price (P 0 ) Example: #7 Text: BMM Industries pays a dividend of $2 per quarter. The dividend yield on its stock is 4.8%. What is the current stock price? Solution: Annualize the dividend and solve the above equation for P 0 P 0 = DIV / DY = ($2 x 4) / 0.048 = $166.67 Q: Why is the dividend yield calculation an inadequate measure of return for stocks? A: It does not take into account any capital gains or capital losses! Background for DDM Price of Stock (or Bond) Today = P 0 = PV future cash flows i.e. Expected return = r = DIV yield + Price yield r = DIV 1 / P 0 + (P 1 – P 0 ) / P 0 r = (DIV 1 + P 1 ) / P 0 Solving for P 0 = (DIV 1 + P 1 ) / (1 + r ) 1 i.e. current stock price is equal to next year’s dividend (DIV 1 ) plus next year’s price (P 1 ), discounted by the required rate of return (r). Example : Copper Inc.’s dividend next year will be $5 per share. The forecast stock price next year is $105. Equally risky stocks of other companies offer expected returns of 10%. What should Copper Inc.’s stock sell for?
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern