Baseball2 ?
The general case for figuring a stock value (it also figures a bond or
loan value too) is:
P0 = D1 / (r-g)
P0 = today's price
D1 = dividends in period 1
r = required rate of return (in decimals)
g = dividend growth rate
You?ve simplified this greatly by saying that there?s an annual
dividend and that it never changes. So, g (growth rate) = 0 and
today?s price is:
P0 = D1 / r
As a result you?ve figured the price correctly at $66.67.
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Essentially the $8 paid on the preferred is the ?interest? on holding
1 share of the $66.67 stock. In fact, securities analysts would move
this preferred stock into ?debt? rather than equity when doing a
discounted cash flow.
The dividends won?t change a year from now ? they?ll still be $8 and
still be paid in perpetuity. This stock price will change only if the
discount rate changes. So it will still be $66.67.
The dividend yield will match the discount rate ? by definition. But
you can calculate it too:
Yield = Dividend / Stock Price = $8 / $66.67 = .12 or 12%
With no change in stock price, there?s no capital gain.
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A final note: if there were some constant growth in the dividend, of
say 4% you?d recalculate the stock price every year and would be able
to determine capital gains. But in the case of a constant perpetuity,
it changes price only with a change in discount rate or if the company
should default on the dividends.
Best regards,
Omnivorous-GA |