Question

Discuss how we can use the Dividend (Gordon) Growth model to indicate the intrinsic value of company shares. Be sure to provide as part of this discussion certain assumptions we can make regarding the growth and the required rate of return to be used in this analysis and limitations of utilizing this model for valuation purposes.

Answer #1

Dividend discount model is used to find the intrinsic value of the equity of the firm

Formula is D1/(k-g)

Where D1 is dividend for first year

K is cost of equity

And g is growth

Assumptions

Dividends will be payed in perpetuity

Growth is constant and dividends will grow till perpetuity

Growth rate is less than cost of equity

The above mentioned assumptions are the limitations of this model. And it is unable is find the Value of non dividend paying stock and also disregards buyback of shares

Calculate the intrinsic value for the shares of your selected
company using Dividend growth model or P/E Ratio model. Justify the
workings, if any. Compare the intrinsic value to its current share
price. Is the share overvalued or undervalued? Explain in detail
the rationale(s) of using Dividend growth model or P/E Ratio model
in your stock valuation.
[Hint: The financial data could be obtained from the company’s
annual reports]
For AIR ASIA group berhad
Dividend growth model= D1/(k-g)
=RM0.9/...

Part 1: Consider the Gordon model of constant growth rate
assumption. State briefly what this model says about the value of
stocks. In 2019, Walmart paid $2.12 in dividends per share. The
stock traded for about $119 per share towards the end of the year.
Find out a set of inputs to the Gordon growth model (e.g., the
assumed growth rate g and the required rate of return r, that make
the intrinsic value of the stock equal to the...

Which of the following statements is incorrect regarding the
constant growth model?
a.Another name for the dividend to be received in one year
divided by the current stock price is the expected dividend
yield.
b.The constant growth model assumes that earnings, dividends and
stock prices are expected to grow at a constant rate.
c.If the dividend growth rate is zero, the constant growth model
becomes a zero-growth valuation model.
d.The constant growth model can still be used if the required...

Use the variable growth model to predict the intrinsic value of
the Rhyhorn company stock. Assume that dividends will grow at a
variable rate for the next three years (2019, 2020, 2021). After
that, the annual rate of growth in dividends is expected to be 6%
and stay there for the forseeable future. Starting with the latest
(2018) annual dividend of $2.06 pershare, Rhyhorn's earnings and
dividends are estimated to grow by 17% in 2019, by 12% in 2020, and...

Explain why we can use the present value of a no-growth
perpetuity to quickly estimate the value of a relatively
long-lived, no-growth financial asset. Make sure you provide a
mathematical example.

A CFO says, “The dividend growth model implies that the current
stock price equals the present value of future dividends. We thus
increase dividend payouts rather than retaining earnings to
maximize the stock price.” Do you agree with the CFO? Justify your
answer. (You do not have to criticize the dividend growth model but
discuss the CFO’s interpretation of the model.)
Regarding the CFO’s statement above, a treasurer responds as
follows: “I do not agree. Retained earnings can be reinvested...

Management action and stock value REH corporstions most recent
dividend was $3 per share, its expected annual rate of dividend
growth is 5% and the required return is now 15%. A variety of
proposals are being considered by management to redirect the firms
activities. Determine the impact on share price for each of the
following proposed actions, and indicate the best alternatives.
Calculate your answers to each of the 5 parts from this problem
(a through e). Make sure to...

The value of a share of common stock depends on the cash flows
it is expected to provide, and those flows consist of the dividends
the investor receives each year while holding the stock and the
price the investor receives when the stock is sold. The final price
includes the original price paid plus an expected capital gain. The
actions of the marginal investor determine the equilibrium stock
price. Market equilibrium occurs when the stock's price is
-Select-less thanequal togreater...

Per Block, Green Street Advisors uses a “valuation” method
called “warranted share value”. This Approach relies on
which valuation method as part of the process:
DCF
Gordon Growth Model
NAV
All of the Above
Are AFFO numbers commonly found in the published financial
statements of publicly traded REITs?
Yes
No
The benefit of the discounted cash flow method in valuing a
REIT is that an analyst or investor can derive this type of fair
price:
A relative number to be used...

QUESTION 2.
Remember that just like projects, bonds, or any other asset, the
intrinsic value (fair value of
any asset) is just the present value of all of its future cash
flows. For stocks, these future cash
flows are dividends. Even if a firm does not currently pay any
dividends, it is fair to assume
that it will in the future. Even if the investor does not plan on
holding on to a stock for a very
long time, whomever...

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