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

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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

As the informaton of US companies is not readily available, information of two indian company with annual dividend records was taken for calcuation. The details are as follows Company Indian Oil Corporation Ltd IOCL Reliance Industries Ltd RIL Face Value of share 10 Dividend History IOCL RIL (dividiend declared as % of face value) 2011 50% 80% 2012 50% 85% 2013 62% 90% 2014 87% 95% 2015 66% 100% Growth rate of dividends 20.11 20.12 2013 2014 2015 IOCL - Dividend Amount 5 5 6.2 8.7 6.6 (Face value of share * Dividend % Dividend Growth = (Dividend in 2015/Dividend in 2011)^(1/No of years) - 1 =(6.6/5)^(1/5) - 1 0.057097 or 5.72% RIL - Dividend amount 8 8.5 9 9.5 10 Dividend growth =(10/8)^(1/5)-1 0.04564 or 4.56% IOCL Required rate of return r 10% growth rate of Dividends 5.72% Dividend ffor 2015 66%   or 6.60 Dividend for 2016   = 6.60 * (1+growth rate) =6.60*1.0572 6.97752 Estimated Price = Expected dividend for 2016 / (required rate of return - growth rate of dividend) = 6.97552/(0.10-0.0572) 163.0262 or 163.05 (rounded off) Similarly if the required rate of return is 20% then the estimated price would be Estimated price = 6.97552 / (0.20-0.0572) 48.84818 or 48.85 (rounded off) RIL Required rate of return r 10% growth rate of Dividends 4.56% Dividend ffor 2015 100%   or 10.00 Dividend for 2016   = 10.00 * (1+growth rate) =10.00*1.0456 10.456 or 10.5 (rounded off) Estimated Price = Expected dividend for 2016 / (required rate of return - growth rate of dividend) = 10.50/(0.10-0.0456) 193.0147 or 193 (rounded off) Similarly if the required rate of return is 20% then the estimated price would be Estimated price = 10.50 / (0.20-0.0456) 68.00518 or 68 (rounded off) Based on the above Esitmated price of IOCL If required rate of return is 10% 163.05 If required rate of return is 20% 48.85 Price of the share on 01/01/2016 216.4 Estimated price of RIL If required rate of return is 10% 193 If required rate of return is 20% 68 Price of the share on 01/01/2016 507.65 Based on the above both the stocks are overpriced

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