This questions is directly related to stock valuation. Answer the following ques

Question

This questions is directly related to stock valuation. Answer the following question: Use two (2) companies that have paid out dividends for the past five years (2011-2015) 1.Using the past dividend payout information.between 2011 and 2015, compute the growth rate (g) for these companies. Your companies must have complete history of dividend payout during these periods. You can find such information at www.dividendinformation.com. If your company lacks the dividend payout information, you need to select new company. Show me your works (35 points), 2 First, let's assume that required return (R) is 10% for all these companies. Using R, dividend information, and growth rate (g) from the question 1, compute the stock prices of these companies. Second, let's assume that required return (R) is 20% for all these companies. Using R, dividend information, and growth rate (g) from the question 1, compute the stock prices of these companies. Show me your works (35 points). 3. Compare your estimated stock prices with actual stock prices as of January 2, 2016. Then tell me whether each stock is undervalued or fair-valued or overvalued based on your estimation. What's your decision if you hold these stocks? What's your decision if you don't hold these stocks? Please show step-by-step formulas and ways you achieve all answers.

Explanation / Answer

Stocks selected are Triangle Cap Inc. TCAP and Black Box Corp BBOX

TCAP has paid the following dividends from 2011-2015

http://www.dividendinformation.com/TCAP_dividends/

The growth rate is calculated as (Dividend in present year - Dividend in previous year)/Dividend in previous year

Note that dividend in 2011 is calculated by using dividend in 2010 which was 0.41.

If required return is 10%

P=D1/r-g

=2.36/0.10-(-0.07813)

=13.249

if rate of return is 20%

=2.36/0.20-(-0.07813) =8.48

The price of TCAP on 4 Jan 2016 was 18.83. The stock is overvalued by $5.5 if 10 percent required rate and overvalued by $10 if the required rate is 20 %.

If I hold this stock then I may suffer a loss if a price correction happens in future.

I will sell the stock of TCAP

Similiarly for blackbox corp.

The

f required return is 10%

P=D1/r-g

=0.43/(0.10-0.1025)

price should be =$4.19

if rate of return is 20%

price should be = 0.43/0.20-(-0.1025) =$2.047

On 4th Jan 2016 the stock closed at $8.73. In both the required rates of 10% and 20% it appears to be overvalued.

If I hold this stock then I may suffer a loss if a price correction happens in future.

I will sell the stock of blackbox.

YEAR DIVIDEND g 2011 1.77 0.5576 2012 2.02 0.141243 2013 2.16 0.069307 2014 2.56 0.185185 2015 2.36 -0.07813

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