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A company expects to grow its dividend by 2 percent each year forever The expected dividend in year 1 is 1.00 Investors require a 6 percent rate of return on this stock What is the new stock price?
Restart17
Stock price = div/K-g
Stock price = 1/6%-2%
Stock price = 25
Div = Dividend
K = rate of return
g = growth rate
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∙ 14y ago
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How does Walter formula of dividend distribution help in understanding the dividend policies?
The term dividend refers to that part of after-tax profit which is distributed to the owners (shareholders) of the company. The undistributed part of the profit is known as Retained earnings. Higher the dividend payout, lower will be retained earnings.The dividend policy of a company refers to the views and policies of the management with respect of distribution of dividends. The dividend policy of a company should aim at shareholder-wealth maximization.The essence of dividend policy is:If the company is confident of generating more than market returns then only it should retain higher profits and pay less as dividends (or pay no dividends at all), as the shareholders can expect higher share prices based on higher RoI of the company. However, if the company is not confident of generating more than market returns, it should pay out more dividends (or 100% dividends). This is done for two reasons. One, the shareholders prefer early receipt of cash (liquidity preference theory) and second, the shareholders can invest this cash to generate more returns (since market returns are expected to be higher than returns generated by the company).Over the years, various models have been developed that establish the relationship between dividends and stock prices. The most important of them is Walter Model:Walter ModelProf James E. Walter devised an easy and simple formula to show how dividend can be used to maximize the wealth position of shareholders. He considers dividend as one of the important factors determining the market valuation. According to Walter, in the long run, share prices reflect the present value of future stream of dividends. Retained earnings influence stock prices only through their effect on further dividends.Assumptions:The company is a going concern with perpetual life span.The only source of finance is retained earnings. i.e. no other alternative means of financing.The cost of capital and return on investment are constant throughout the life of the company.According to Walter Model,P = [D + (E - D) x ROI / Kc] / KcP= Market price per share E= Earnings per shareD = Dividend per share Kc= Cost of Capital (Capitalization rate)ROI = Return on Investment (also called return on internal retention)The model considers internal rate of return (IRR), market Capitalizatio rate (Kc) and dividend payout ratio in determination of share prices. However, it ignores various other factors determining the share prices. It fails to appropriately calculate prices of companies that resort to external sources of finance. Further, the assumption of constant cost of capital and constant return are unrealistic.If the internal rate of return from retained earnings (RoI) is higher than the market capitalization rate, the value of ordinary shares would be high even if the dividends are low. However, if the RoI within the business is lower than what market expects, the value of shares would be low. In such cases, the shareholders would expect a higher dividend.If RoI > Kc, Price would be high even if Dividends are lowWalter model explains why market prices of shares of growth companies are high even if dividend payout is low. It also explains why the market prices of shares of certain companies which pay higher dividend and retain low profits are high.Example:A Ltd. paid a dividend of Rs 5 per share for 2009-10. the company follows a fixed dividend payout ratio of 30% and earns a return of 18% on its investments. Cost of capital is 12%. The expected price of the shares of A Ltd. using Walter Model would be calculated as followsEPS = Dividend / payout Ratio = 5 / 0.30 = Rs.16.67According to Walter Model,P = [D + (E - D) x ROI / Kc] / KcP = [5 + 16.67 - 5.00) x 0.18 / 0.12] / 0.12P = 187.50
Do you have to pay income tax on a repo deficiency that you are making payments on?
If you are making payments on a repo deficiency you will not have to pay income tax on the amount. You would have to pay income tax on any part of the deficiency the company wrote off or forgave. The IRS expects you to claim the forgiven amount as income on your taxes.
How much the penalty for below minimum balance savings?
It actually depends on the bank and the type of account you hold with them. Let us say you have an account with a bank that expects you to maintain a minimum balance of Rs. 1000/- at all times, they might charge you around Rs. 50/- or Rs. 100/- per month if you fail to maintain the minimum expected balance. You need to check with your bank for the exact charges.
What does 7 days nett mean?
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Is pier 1 imports in financial trouble?
Word has it that the price of Pier 1 stock is not a true indicator of the company's financial condition. It has more to do with actual cash flow and it has been indicated Pier 1 has considerable cash flow, in addition to more brand appropriate merchandise that is appearing in the stores Pier 1 expects to survive and, as the economy turns around, even prosper. Confidence is high!
What is the expected dividend in each of the next three years if XYZ Company paid a one dollar per share dividend yesterday and expects the dividend to grow steadily at a rate of 4 percent per year?
Year one 1.04, two 1.044, three 1.052
Do you know what is expected out of you?
No, SDI expects for me to continue doing the best that I can to move forward.
What does friar Lawrence find in the Capulet's tomb?
Two more corpses than were expected. He expected Tybalt to be there, but not Paris or Romeo. He expects Juliet to be there but she is not a corpse. Yet.
What does relevant range means?
The span of activity in which a company expects to operate.
What are some risks in capital investments?
What are the chances it will get exactly what it expects?What are the chances it will get more or less?What are the chances it will get a lot more or a lot less--or even lose all the money invested and get nothing back?
Are maid of honors expected to become godmothers?
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Are sets of rules and procedures a company expects employees to accept and follow?
Protocols.
What is an example of rate of return?
For example, if a company invests $1,000 and expects to get back $1,100 one year from today, it expects to earn 10 percent (= (1,100 ? 1,000)/1,000).
Who is an investee company?
investee company is one in which other entity injects a certain amount and expects some profit\loss in return
Hart Enterprises recently paid a dividend It expects to have a nonconstant growth of 20 percent for 2 years followed by a constant rate of 5 percent thereafter The firms required return is 10 percent?
no
What does it mean when you say it is a risk-reward payoff when considering capital budget?
A ratio used by many investors to compare the expected returns of an investment to the amount of risk undertaken to capture these returns. This ratio is calculated mathematically by dividing the amount he or she stands to lose if the price moves in the unexpected direction (i.e. the risk) by the amount of profit the trader expects to have made when the position is closed (i.e. the reward).
What is projected sales?
A sales projection is the amount of revenue a company expects to earn at some point in the future.
