More Stocks Valuation Tutorials
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This section is similar to the section
on valuating bonds.
If you recall, a corporation can finance its operations
in 2 ways:
1) Issue bonds (debt financing)
2) Issue common or preferred stock shares
We will go on to value these common
and preferred stock shares using various dividend growth
formulas.
Stocks Valuation Formulas
In order to perform stocks valuation
questions, we will be using a combination of these two
formulas.
Po
= D / Re
Po = Current Stock Price
D = Dividends
Re = Shareholder's return |
Po
= D1 / (re - g) or Po
= Do (1+g) / (re - g)
Po = Current Stock Price
D1 = Next Year's Dividends
Re = Return on Equity
G = Growth Rate
Do = Current Dividend |
Example 1:
ABC Company has issued $3 of dividends
per share for the past several years. Investory's return
requirement is 9.5%. Using this given information, what
is the current stock price?
Po = D/ Re
Po = 3 / 0.095
Po = $31.58
Example 2:
The current company stock price is
$42.70. Dividends into the future are $2.50 / share. What
is the shareholder's return requirement?
Po = D / Re
4278 = 2.50 / Re
Re = 2.50 / 42.58
Re = 0.0584 -> 5.84%
Example 3:
ABC company's next dividend is expected
to be $4. This dividend is expected to grow at 3% per
year. If the investor's return requirement is 9%, what
is the current stock price?
Next Dividend = D1 = $4
Growth = g = 0.03
Investor's Return = re = 0.09
Po = D1 / (re - g)
Po = 4 / (0.09 - 0.03)
Po = 4 / 0.06
Po = $66.67
