Unit 12

Question 1

Dividend Models

Answer 1

Fundamental analysts use this to help determine the value of a common stock.

Dividend Discount Model

Dividend Growth Model

Question 2

Dividend Discount Model

What’s the concept.

Solve for required rate of return and market price. (You have a $100 preferred with a 6% div. Required rate = 8%. What should the current market price of the stock be?)

Answer 2

Discounted back

States the current market value of a stock should be equal to the present value of all future dividends.

6% Dividend on $100 preferred = $6 / 8% Required = $75.
So if the preferred stock was selling for $75/share, the $6 dividend would produce an 8% return.

Question 3

Dividend Growth Model

Answer 3

Growing

Model assumes the amount of the annual dividend will grow at a constant rate. (So couldn’t be a preferred bc their rate is fixed)

Should be obvious computed value will continue to be higher.

Which model computes a higher current stock price? The growth one