A friend tells you that you should buy AST Company stock as it is a "great deal." It is January 1, 2020 and the stock is trading at $25 per share. You obtained the financial statements for Leclerc and determined the following: - Book value is $12 per share as of December 31, 2019. - Earnings for 2019 were $4.0 per share. - Earnings are expected to grow at 20% for the next four years. - Dividend payout is 40%. - Residual income is expected to be zero from 2021 onwards. - Cost of equity capital is 15%. Determine, using the residual income method, whether you should buy AST stock as of January 1, 2020.
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
A friend tells you that you should buy AST Company stock as it is a "great deal." It is January 1, 2020 and the stock is trading at $25 per share. You obtained the financial statements for Leclerc and determined the following:
- Book value is $12 per share as of December 31, 2019.
- Earnings for 2019 were $4.0 per share.
- Earnings are expected to grow at 20% for the next four years.
- Dividend payout is 40%.
- Residual income is expected to be zero from 2021 onwards.
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Determine, using the residual income method, whether you should buy AST stock as of January 1, 2020.
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