Unformatted text preview: we have this situation:
0 r = 13%
g = 0%
| 1 2 3 | | | g = 0%
2.00 2.00 1.77
25.72 = P0 g = 0% 2.00 4
g = 6% | 2.12 2.12
P3 = 30.29 =
0.07 During year 1:
Dividend Yield = $2.00
= 0.0778 = 7.78%.
$25.72 Capital Gains Yield = 13.00% - 7.78% = 5.22%.
Again, in year 4 temp force becomes a constant growth stock; hence g = capital gains
yield = 6.0% and dividend yield = 7.0%. Mini Case: 7 - 22 j. Finally, assume that Temp Force¶s earnings and dividends are expected to
decline by a constant 6 percent per year, that is, g = -6%. Why would anyone be
willing to buy such a stock, and at what price should it sell? What would be the
dividend yield and capital gains yield in each year? Answer: The company is earning something and paying some dividends, so it clearly has a
value greater than zero. That value can be found with the constant growth formula,
but where g is negative:
1 r g = 0 (1 g) r g
© ¨ P0 = = $2.00(0.94)
0.13 ( 0.06)
0 .19 ince it is a constant growth stock:
g = Capital Gains Yield = -6.0%,
Dividend Yield = 13.0% - (-6.0%) = 19.0%.
As a check:
Dividend Yield = $1.88
= 0.190 = 19.0%.
$9.89 The dividend and capital gains yields are constant over time, but a high (19.0 percent)
dividend yield is needed to offset the negative capital gains yield. Mini Case: 7 - 23 k. What is market mutliple analysis? Answer: Analysts often use the P/E multiple (the price per share divided by the earnings per
share) or the P/CF multiple (price per share divided by cash flow per share, which is
the earnings per share plus the dividends per share) to value stocks. For example,
estimate the average P/E ratio of comparable firms. This is the P/E multiple. Multiply
this average P/E ratio by the expected earnings of the company to estimate its stock
price. The entity value (V) is the market value of equity (# shares of stock multiplied
by the price per share) plus the value of debt. Pick a measure, such as EBITDA, sales,
customers, eyeballs, etc. Calculate the average entity ratio for a samp...
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- Spring '12
- Valuation, Dividend yield