Business Administration - Accounting & Financial Planning FIN401 Chapter Notes - Chapter 10: Toronto Stock Exchange, Dividend Yield, Growth Stock

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greenmuskrat329

20 Jan 2018

School

Seneca College

Department

Business Administration - Accounting & Financial Planning

Course

Business Administration - Accounting & Financial Planning FIN401

Professor

Larry Hurst

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Document Summary

Valuatio(cid:374) of co(cid:373)(cid:373)o(cid:374) stock: dete(cid:396)(cid:373)i(cid:374)i(cid:374)g the yield (cid:894)ror(cid:895) f(cid:396)o(cid:373) the ma(cid:396)ket p(cid:396)i(cid:272)e, the yield (cid:894)ror(cid:895) (cid:272)o(cid:374)sists of (cid:1006) thi(cid:374)gs: di(cid:448)ide(cid:374)d (cid:455)ield = d(cid:1005)/p(cid:1004) a(cid:374)ti(cid:272)ipated o(cid:396) e(cid:454)pe(cid:272)ted g(cid:396)o(cid:449)th i(cid:374) the futu(cid:396)e = g. The p(cid:396)i(cid:272)e-ea(cid:396)(cid:374)i(cid:374)gs (cid:894)p/e(cid:895) (cid:396)atio (cid:272)a(cid:374) also (cid:271)e used to (cid:448)alue sto(cid:272)ks. The ea(cid:396)(cid:374)i(cid:374)gs a(cid:374)d sales g(cid:396)o(cid:449)th of the fi(cid:396)(cid:373) I(cid:374) ju(cid:374)e (cid:1006)(cid:1004)(cid:1005)(cid:1008), the a(cid:448)e(cid:396)age p/e fo(cid:396) the top (cid:1007)(cid:1004)(cid:1004) (cid:272)o(cid:373)pa(cid:374)ies of the to(cid:396)o(cid:374)to sto(cid:272)k. I(cid:374)di(cid:272)ates positi(cid:448)e e(cid:454)pe(cid:272)tatio(cid:374)s fo(cid:396) the futu(cid:396)e of the (cid:272)o(cid:373)pa(cid:374)(cid:455) (cid:373)ea(cid:374)s the sto(cid:272)k is (cid:373)o(cid:396)e e(cid:454)pe(cid:374)si(cid:448)e (cid:396)elati(cid:448)e to ea(cid:396)(cid:374)i(cid:374)gs. T(cid:455)pi(cid:272)all(cid:455) (cid:396)ep(cid:396)ese(cid:374)ts a su(cid:272)(cid:272)essful a(cid:374)d fast-g(cid:396)o(cid:449)i(cid:374)g (cid:272)o(cid:373)pa(cid:374)(cid:455) I(cid:374)di(cid:272)ates (cid:374)egati(cid:448)e e(cid:454)pe(cid:272)tatio(cid:374)s fo(cid:396) the futu(cid:396)e of the (cid:272)o(cid:373)pa(cid:374)(cid:455) (cid:373)a(cid:455) suggest that the sto(cid:272)k is a (cid:271)ette(cid:396) (cid:448)alue o(cid:396) (cid:271)u(cid:455) Relati(cid:374)g the p/e multiple to the di(cid:448)ide(cid:374)d valuatio(cid:374) method (also called. Questio(cid:374) (cid:1008: u(cid:374)io(cid:374) e(cid:374)te(cid:396)p(cid:396)ise has a(cid:374) e(cid:454)pe(cid:272)ted p(cid:396)ofit (cid:373)a(cid:396)gi(cid:374) of (cid:1005)(cid:1006) pe(cid:396)(cid:272)e(cid:374)t, total asset tu(cid:396)(cid:374)o(cid:448)e(cid:396) (cid:396)atio of (cid:1005). (cid:1009) a(cid:374)d a le(cid:448)e(cid:396)age (cid:396)atio of (cid:1004). (cid:1012).

Related Questions

Sabrina Gupta, an investment advisor with a major brokerage firm, was examining Wal-Mart Stores, Inc. (Wal-Mart) stock and its valuation. Gupta wondered whether to recommend the stock to any of her new clients or to existing clients who did not currently have Wal-Mart in their portfolios.

Her key task was to use an intrinsic value approach to price the shares and to then compare the resulting price with the price at which the stock was traded in the market. Gupta wanted to use alternative valuation methods and assumptions to produce intrinsic value estimates for Wal-Mart stock.

She was interested in seeing if the alternative methods would point to a consensus regarding the valuation of the stock and to see if the valuations suggested an investment opportunity given the current market price. Methods she contemplated to use were:

Multi-stage growth model

Price Earnings Multiple

Most valuation methods Gupta considered required a common set of inputs:

Future Cash Flows to Wal-Mart Investors

Growth rate of future cash flows

Discount factor or required rate of return by Wal-Mart investors

Gupta gathered data to determine each of the above.

Gupta thought that Dividends to Wal-Mart shareholders would adequately capture the cash flows to Wal-Mart shareholders; she also thought that this approach would simplify her task and she would revisit more complex valuation models if she felt the need.

Gupta thought that CAPM would provide her a relatively reliable estimate of the required rate of return. CAPM based required rate of return can be estimated by using a risk free rate, systematic risk of the firm and equity market risk premium. Gupta thought that in a valuation exercise that involve long term cash flows, 10-year government bond yield would be an appropriate risk free rate of return estimate. She checked the 10 year note rate and found out that it was about 3.68%. Gupta searched for Wal-Mart beta in Bloomberg. Bloomberg estimates betas by regressing the S&P 500 returns on the firm returns over the past two years and arrives at a ârawâ beta estimate. Bloomberg makes an adjustment in raw beta based on some academic research. Gupta is confident that Bloomberg adjustment is justified and she uses Wal-Mart beta estimate of 0.66 in her analysis.

While Gupta is aware of the importance of EMRP assumption, she thinks that Bloombergâs historical estimate of 5.05% is a safe assumption. She is aware of the fact that some studies suggest a larger risk premium of approximately six per cent, while others suggest a much lower forward-looking premium of less than four per cent. She is mindful of the arbitrariness of her assumption, and she takes a note to revisit this issue if her valuations produce unreasonable estimates.

Anticipated dividend growth (g) is often estimated in a variety of ways.

First, observed historical dividend growth can be assumed to continue in a perpetual fashion.

Second, future dividend growth can be estimated on the basis of recent estimates of analysts.

Gupta noted that the consensus annual Wal-Mart dividend for fiscal year 2011 was $1.21, and one respected analyst had estimated the expected constant dividend growth (in perpetuity) at approximately 3%.

As the chart suggests, both earnings and dividend growth rates are declining but they seem to be higher than the ârespected analystâsâ estimates. Gupta decides to use several alternative perpetual growth assumptions to see the impact on price. Since Gupta decided to use variants of dividend discount model (DDM), she checked the anticipated earnings for 2011. Analystâs estimates suggested $4.10 earnings per share. Gupta decided to use 10% growth rate from 2011 to 2012 and assumed a steady decline to 3% in 13 years (until 2024) where the perpetual growth rate of 3% resumes. She also assumed that WalMart will increase its dividend payout ratio from 30% to 55% from years 2012 to 2024. You are asked to reproduce Guptaâs analysis of multi-stage growth model and double check her valuation by using an earnings multiple. You have all the data you need to conduct the multi stage discounted growth model analysis, but you will need to do some research about the multiples valuation.

indigoox363

P/E Ratio Model and Future Price Kellogg Co. (K) recently earned a profit of $2.52 earnings per share and has a P/E ratio of 13.5. The dividend has been growing at a 5 percent rate over the past few years. If this growth rate continues, what would be the stock price in five years if the P/E ratio remained unchanged? What would the price be if the P/E ratio declined to 12 in five years?

maroonwolf213

The company just generated total earnings of $100,000 today and after repurchasing shares, there are currently 10,000 shares outstanding. The companyâs return on new investment is 10%. The dividend payout ratio is 40%, and the firm uses 10% of earnings to repurchase shares each year. Consider the total payout model and assume that the cost of capital is 11%.

a.) What is the retention rate?

b.) What must be the growth rate of earnings?

c.) What is the total projected earnings one year from now?

d.) What is the Total Payout amount one year from now?

e.) What is the total value of the firmâs equity and the price per share today?

f.) What is the dividend yield?

g.) What is the growth rate of dividends?

champagnecat486

Business Administration - Accounting & Financial Planning FIN401 Chapter Notes - Chapter 10: Toronto Stock Exchange, Dividend Yield, Growth Stock

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