A company has paid annual dividends of RM0.48, RM0.60 and RM0.62 a share over the past three years, respectively. The company now predicts that it will maintain a constant dividend since its business has leveled off and sales are expected to remain relatively constant. Given the lack of future growth, you will only buy this stock if you can earn at least 14% rate of return. What is the maximum amount you are willing to pay for one share of this stock today?
PrivateBanker’s answer is almost right but off by some calculator problem and not very general.
Use dividend capitalization model which says:
Required Return = Dividend Payout ratio + Growth rate
14% = 0.62/share price + 0% => share price = 0.62/0.14 = RM4.43
E(R) = RFR + βstock (Rmarket – RFR)
* E(R) = the required rate of return, or expected return
* RFR = the risk free rate
* βstock = beta of the stock
* Rmarket = return of the market as a whole
* (Rmarket – RFR) = the market risk premium, or the return above the risk-free rate to accommodate additional unsystematic risk
Read more: http://www.investopedia.com/articles/fundamental-analysis/11/calculating-required-rate-of-return.asp#ixzz1QendzQE5
DIVIDENT IS SIMPLY THE RETURNS WHICH WE GET FRM THE COMPANY ON INVESTMENT..
Dividend Yield = annual dividend per share / stock’s price per share
References :
use the perpetuity formula…
dividend / r = 62/0.14 = $371.43<<<oops, bad calculator and I thought dollars, not cents, sorry! 0.62/0.14 = RM4.43
References :
That will be too much complicated math.
References :
PrivateBanker’s answer is almost right but off by some calculator problem and not very general.
Use dividend capitalization model which says:
Required Return = Dividend Payout ratio + Growth rate
14% = 0.62/share price + 0% => share price = 0.62/0.14 = RM4.43
References :