Stock valuation The report conducts at least seven stock valuations to Nestlé S.A and illustrates their importance in determining the future profitability of the stocks in market. Hirschey, (2013) argued that the research performed the valuations using several techniques which would increase an investor’s acumen before making any investment decisions. Valuation matters Even if an investor acquires the best stock in the market, but not gain from it more so when it gets bought through a lofty premium. Similarly, it becomes possible to acquire a poorly performing stock but at a very cheap price which makes it a profitable investment. In order to determine whether Nestlé S.A is an invaluable stock it becomes necessary to conduct the valuation to assess its
The Bond Market – The bond (debt) market is where companies go to get very big loans. Generally, when the share prices increase, the bond prices decrease. However, there are many distinct kinds of bonds like: Treasury Bonds, corporate bonds, municipal bonds etc. Bonds also provide some of the liquidity that keeps a free market economy like the American economy operating effortlessly. It is important to comprehend the relationship between Treasury bonds and Treasury bond yields.
It is a rate of return that convinces investors make an investment, especially long-term investment decisions (Da, Guo and Jagannathan, 2012). Moreover, since the cost of equity does involve the expectations of the market, it generally will be harder to measure. The other widely used method to calculate the cost of equity is by using the Gordon’s Growth Model (also known as the Dividend Discount Model). It calculates the fundamental value of today’s stock, based on the stock’s expected future dividends (Farrell, 1985). The dividend discount model focuses strictly at the future dividends as the sum of cash flows discounted by investors required rate of return and expected growth of dividend.
Mini Case CH-4 A) Par or face value, Coupon rate, Maturity ,Issue date and Default risk. B) Call provision: a provision in the contract of the bond which gives the issuer the ability to redeem the bond before its maturity date. Sinking fund provision: a provision in the contract of the bond that requires the institution issuing the bond to retire a portion of the bond annually. Risk: Call provision: Risky for investor and the relatively safe for the issuer. Sinking fund provision: Risky for issuer and the relatively safe for the investor.
When we consider the financial market, it can be dividing into the Money Market and the Capital Market. The Money Market is the market for assets with maturities of less than one year, such as Treasury bills, commercial paper, and certificates of deposits. The major purpose of the money market is to facilitate the liquidity management in the economy. The main issuers in the Money Market are the Government, banks and private companies, while the main investors are banks, insurance companies, pension, and provident funds. The Capital Market is the market for trading in assets for maturities of greater than one year, such as Treasury bonds, private debt securities (bonds and debentures) and equities (shares).
A research was done Terrance Odean in 1998 under the name “Are Investors reluctant to Realize Their losses?”. Odean tested the disposition effect as said by Shefren and Statsman, that is the tendency to hold losing stock too long and sell winning stock too early. Odean also considered tax consequences. Odean analyzed trading transaction records at a brokerage house. These records revealed that gains are realized quickly by investors than the losses.
Lanco Comupters Ltd has the following capital structure that it believes to be optimal. Assets Rs 10,00,000 Debt Rs 3,00,000 Preferred Stock Rs 1,00,000 Common Stock Rs 6,00,000 The current rate of interest is 12%. The firm’s tax rate is 32.5% and its common stock sells for Rs 40 a share. The firm pays a Rs 2 per share cash dividend that is expected to grow annually at 7%. Preferred stock pays a Rs 10 per share annual dividend and is currently selling for Rs 92 a share.
For planning to seize business opportunities and the potential threats, managements have to use SWOT analysis. A SWOT analysis helps to determine the capacity of the entity against the reality of the business environment and the administration can work directed toward areas where large capacities and opportunities are
The dividend decision of a firm is intrinsically related to the financing and investment decision. This association has given rise to various questions such as the size of the dividend, the effect on the valuation of the firm and the like. Even after multiple researches carried out, the dividend decision still remains a mystery to be solved. Lintner (1956) contends that it is current earnings and the past dividends which determines the target dividend ratio in the developed market. The firms have to make various adjustments in order to attain such target and thus have to follow a stable dividend policy .
In a way, the valuation is carried out with the assumption that the dividends will be received till infinity. The formula is: VPS = Div / k PS 3. The Advantages and Disadvantages of Bonds and Stocks In bonds and stocks, there also have their own advantages and disadvantages. The advantages are good for both of it to growth and be greater in future and also will be study by the investors before they decided to invest in the company while for disadvantages is vice versa. Bonds are purchased and exchanged generally by institutions like central bank, sovereign wealth funds, pension funds, insurance agencies, hedge funds and banks.