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Sumitted By" Amol Sonthalia: Sapm Assignment

This document discusses stock valuation models, including: 1) The general dividend discount model for valuing stocks based on expected future dividend payments. 2) The constant growth model, which simplifies the general model for stocks with dividends expected to grow at a constant rate forever. 3) An example valuation of a stock using the constant growth model with given dividend and growth rate parameters.

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0% found this document useful (0 votes)
97 views7 pages

Sumitted By" Amol Sonthalia: Sapm Assignment

This document discusses stock valuation models, including: 1) The general dividend discount model for valuing stocks based on expected future dividend payments. 2) The constant growth model, which simplifies the general model for stocks with dividends expected to grow at a constant rate forever. 3) An example valuation of a stock using the constant growth model with given dividend and growth rate parameters.

Uploaded by

Nimish Kumar
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as XLS, PDF, TXT or read online on Scribd
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SUMITTED BY AMOL SONTHALIA 2012013 SAPM ASSIGNMENT

Ans. 1.) The general formula for valuing any stock irrespective of its dividend pattern is the presen P0 = Div1/(1+ Ke) + Div2/(1+ Ke)^2 + Div3/(1+ Ke)^3 + Div4/(1+ Ke)^4 + + Divn/(1+ Ke) Ans. 2)

A constant growth stock is one whose dividends are expected to grow at a constan Constant growth means that best estimation of the future growth rate is some constan Div1 = Div0*(1+g) Div2 =Div1*(1+g) = Div0*(1+g)*(1+g) = Div0*(1+g) ^2 Div3 =Div2*(1+g) = Div0*(1+g) ^2*(1+g) = Div0*(1+g) ^3 . . . Divn =Divn-1*(1+g) = Div0*(1+g) ^n .. And so on...

With this regular dividend pattern the general stock valuation model can be simplified to the follow P0 = Div1/ (Ke g) = Div0*(1+g)/ (Ke g). This is well known Gordon or Constant Growth model for valuing stock. P0 is the present value

Ans 3) (Rf) = Risk free return(%), E(Rm)= expected return on market portfolio(%), E(Rm) - (Rf) = Market Ri Rs = Expected return or required return on security/ stock = Rf +*( E(Rm)-(Rf)) (Rf) E (Rm) E (Rm) - (Rf) 7 13 6 required return on stock = 14.2% Ans 4) (a) given Div0= Rs.5,g= 10%=0.1, Ke=14.2% Div0 g

5 0.1 expected value of the stock one year from now = Rs 5.5 (b) expected dividend yield in any year = Divn/Pn-1 Capital gain yield = (Pn - Pn-1)/ P0 where n is number of year,P is price of stock after 1 yearKe g 0.142 0.1 4.2% would be the expected dividend yield after 1 year Ans. 5) Given P0= Rs. 110, Div0= Rs. 5, g= 10%=0 .1 P0 g 110 0.1 the expected rate of return would be 15% Ans. 6.)

Ke

Given-Ke=15 %=0.15, gs=25 %=0.25, gn =10 %=0.1, Div0=Rs. 5, supernormal growt For supernormal growth P0s = Div1*(1- ((1+g)/(1+Ke))^n)/(Ke - g)) ,P0 = prese Supernormal growth peri No.of Year 0 1 gs D0 D1 0.15 0.25 5 6.25

ASSIGNMENT

its dividend pattern is the present value of its dividend stream. stream is as follows: )^4 + + Divn/(1+ Ke)^n

are expected to grow at a constant rate forever. ture growth rate is some constant number, not we really expect growth to be same each and every year. Many companies hav

so on & so forth.

del can be simplified to the following equation

ing stock. P0 is the present value of stock; Ke is required rate of return & g is constant growth rate

tfolio(%), E(Rm) - (Rf) = Market Risk Premium(%), = coffiecient of risk & return of stock *( E(Rm)-(Rf)) Rs 1.2 7.2

, Ke=14.2% Div1= Div0*(1+g)

5.5 one year from now = Rs 5.5

ny year = Divn/Pn-1

is price of stock Div0 5 dividend yield after 1 year Div1 5.5 P0 130.952381

5, g= 10%=0 .1 Div0 5

Div1

Ke = Div1/P0 +g Ke 5.5 0.15

would be 15%

1, Div0=Rs. 5, supernormal growth period is 4 year +Ke))^n)/(Ke - g)) ,P0 = present value of stock Supernormal growth period 2 3 4 D2 D3 D4 P0s 7.8125 9.765625 12.20703125 24.7426217

gn 0.1

nd every year. Many companies have dividends that are expected to grow steadily into the foreseeable future and such compa

P1 144.047619

dividend yield

capital gain yield 0.042 0.1

Constant normal growth Period D5 = D4*(1+gn) P4 = D5/(Ke-gn) P0n (after 4 year) P0 = P0s + P0n 13.42773438 268.5546875 153.5470142 178.29

ble future and such companies are valued as constant growth stock.

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