Question
Step One: Go to Nasdaq.com and find the stock labled C, it should be Citygroup. Find the dividends tab and make sure it has a
Step One:
Go to Nasdaq.com and find the stock labled C, it should be Citygroup. Find the dividends tab and make sure it has a dividend and has paid a dividend for the last 3 years (at least).
Step Two:
Calculate the value of the stock using the dividend growth model.
Price = D0 (1+g)/i-g
Note One: You are solving for price. Do not put the current stock price in here
Note Two: g and i should be converted from percentage to decimals. ie: 11.5% is .115)
(SHOW YOUR WORK ON THIS STEP). If, when you calculate the value, it doesnt work, dont despair. First, check your numbers. If your calculations are correct, keep in mind that this model wont work if the required return is less than the dividend growth rate. If that is the case, either find a different required return or pick a different stock and try again.
- To calculate the value, remember that youll be using D0. Look on NASDAQ on the summary page and find "Annualized Dividend". Thats your D0.
- For your required rate of return, you should use the average return of an index that your stock is included in, or could be included in (like the S&P 500 or DJIA). Remember, there are many indexes, but to help you out, here are some 5 year average return numbers:
S&P 500: 14%
NASDAQ: 15.5%
- For the growth rate, youll need to calculate this. First click on "Dividend History" and find the past dividends. Note that these are quarterly numbers. Go back at least 5 years (unless there's no record back that far, then go back 3). Then find the growth rate by using your calculator as follows:
P/Y = 4 (because it is quarterly)
N = Number of years from first dividend to current dividend. Remember to multiply this by 4 (because of 4 P/Y)
I = THIS IS WHAT YOURE SOLVING FOR
PV = This is the dividend in the past (at least 3 years ago). Watch out for anomalies, where maybe the stock split and the dividend changed substantially, and avoid that. This is entered as a negative number
PMT = 0
FV = This is what the most recent dividend was. This is entered as a positive.
Step Three: Calculate the Value of the stock based on the P:E Multiplier.
- Find the Earnings Per Share (EPS) of your stock. You can find this on the summary page.
- Find the industry your stock is in. Look on the summary page under industry.
- Find the industry P:E Ratio. Go to csimarket.com and in the search bar, type in the name of your industry. Alternately, you can click the industries tab and then industries will appear below that. Note that you'll need to look through these major categories to find the subcategory that is your industry. After that, find the valuation tab and click on it. Multiple columns will appear. Click on P/E at the top of the column.
- Multiply your EPS X Industry P:E to get the value of your stock based on the P:E Multiplier.
Step Four: Post the following:
- The value you derived based on Step Two
- The value you derived based on Step Three
- The current market price per share of the stock
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