Given the following additional data: HPG T CSCO 5 year expected dividend growth
ID: 2678676 • Letter: G
Question
Given the following additional data:HPG T CSCO
5 year expected dividend growth rate(%):
8.44 4.04 4.68
Long term growth rate after 5 years (%) 5.5 2.0 5.5
Stock Price($) dividend($ annual) Hewlett Packard (HPQ) 25.63 0.48 AT&T (T) 29.39 1.74 Cisco Systems (CSCO) 16.73 0.26
a) Using the 2 step growth model, calculate the price of the 3 stocks.
b) Are any of the stocks an obvious buy compared to the current market price?
c) If you had a stock selected for part b, explain where the analysis may have gone astray.
Explanation / Answer
Stock prices are highly volatile and can be affected by the company's performance as well as many other factors. To make a lot of money in the stock market, you should learn how to predict future stock prices. Stock predictions can be based on the following methods: 1) Use price earnings (P/E) ratio and predicted earnings per share to predict the future price of stocks. If you have the predicted future earnings per share then you can use the P/E ratio to predict future prices because a stock will tend to trade within a certain P/E range. For example: Assume that the share price of Company XYZ is $20. The earnings per share (EPS) of the stock for the last 12 months is $2. Based on the formula (Price Earnings Ratio = Market price per share / Earnings per share), the P/E ratio of the stock XYZ will be 20/2 = 10. Now, we assume that the EPS in future will be $3.00. Also assume that P/E ratio will remain the same at 10. Then, the price of the share will be: 3 * 10 = $30. This will give you an indication whether the stock of Company XYZ is a good buy or not. However, investors should be aware that this is not the sole criteria for stock prices going up or down. 2) Find reliable market related news: Following the latest news, you will be able to predict whether it will have a positive or negative impact on the share prices. Most of the times, stock price will go up when good news is announced. 3) Study the stock chart patterns of a company to analyze and forecast future price movements. 4) Observe the volume growth: Increasing volume is a sign of positive growth in the stock due to some positive news, and this implies a rise in its value in the future. 5) You should be able to predict the earnings of a company. The growth of a company's earnings is the most important factor to consider when analyzing a company. Good financial results will increase investor confidence and this implies an increase in trading volume and price. Article by http://financelearners.blogspot.in
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