Article Categories
- All Categories
-
Data Structure
-
Networking
-
RDBMS
-
Operating System
-
Java
-
MS Excel
-
iOS
-
HTML
-
CSS
-
Android
-
Python
-
C Programming
-
C++
-
C#
-
MongoDB
-
MySQL
-
Javascript
-
PHP
-
Economics & Finance
Banking & Finance Articles
Page 52 of 102
Dividend Growth Model (Gordon Growth Model) of Share Valuation
The Dividend Discount Model or the Gordon Growth Model is a share valuation method that determines a stock’s intrinsic value. This method does not consider the current market conditions. Investors can compare companies against each other using this simple model. Dividend discount model is called "perpetual growth model" because the dividends are usually paid till infinity.Assumptions for Gordon Growth ModelThe Gordon Growth Model considers the following conditions −The company has a stable business model, i.e., there are will be no significant changes in its operations in future.The company will have a stable financial leverage.The company’s growth is constant and unchanging.The ...
Read MoreWhat is meant by dividend capitalization?
Capitalized Dividends are dividends due on the Preferred Shares which are capitalized by adding them to the Stated price of the Preferred Shares.As most closely held companies do not pay dividends, to determine dividend capitalization, the evaluators must first find out the dividend paying capacity of the business. The Dividend paying capability of a company is based on the average net income and the average cash flow. To calculate dividend paying capacity, debt repayment, expansion plans, operation cushion, dividend paying history of a business contractual requirements, past and dividends of a comparable company should be analyzed, among others.After analyzing the ...
Read MoreWhat is the equity capitalization rate?
The equity capitalization rate (ECR) is the capitalization rate that shows the relation between the income from the property in comparison to the equity of the investor. ECR is an important metric as it measures the real cash return at the time of acquisition, i.e., the investor’s money.Usually, the investor’s own funds contribute towards the acquisition cost of the property. If no there is no loan in financing the acquisition of the property, then the investor’s equity is the net acquisition cost. Otherwise, the investor’s equity is the property acquisition cost from which the loan amount is deducted.The formula for ...
Read MoreWhat is the significance of Price-Earnings (PE) ratio?
The PE ratio is the present price of the stock divided by the expressed earning per share of the stock. The PE of a stock is a subject to regular change. As the future retained earnings of a company are often found in the price of a stock, the PE ratio signifies up to what extent the stock price is valued at the earnings of the stock of the last year.PE gives the price one is ready to pay for Re 1 of a company's earnings. As the future net earnings of a company is often uncertain, strong companies can ...
Read MoreRisk-averse Investors Vs Risk-neutral Investors
Investors can be categorized into several types based on their risk preferences. Risk preference is the intention of investors of taking risks. Usually, higher returns are associated with higher risk-taking capability, while lower risks yield lower returns. Risk-averse and risk-neutral investors are categories that divide investors into two types, considering their risk-taking intentions.Risk-averse InvestorsRisk-averse investors are interested in the lowest risk securities and for them, the weight of the investments is more important than the accumulated returns. These investors would almost always choose securities that guarantee lower returns with the least amount of risks. As is obvious, the risk-averse investors ...
Read MoreWhat is supernormal growth of a stock?
In a supernormal growth phase, the stock price increases at a rapid pace. The period in which such anomaly occurs lasts beyond a year. After the supernormal growth, the share shows general properties and grows at a normal rate. Super annual growth is a common phenomenon, provided there is demand for the product produced by the company in the market.Dividend Discount Model: No Dividend Payments GrowthPreferred shares usually pay the stockholders a fixed amount in certain periods. Finding the next present value will give the implied value of the stock.For example, if the company has to pay INR 1.50 in the ...
Read MoreHow to calculate the Variance of Returns?
What is Variance?Variance is a metric that is needed to estimate the squared deviation of any random variable from the mean value. In the portfolio theory, the variance of return is called the measure of risk inherent in a singular or in an asset of portfolios.In general, the higher the value of variance, the bigger is the squared deviation of return of the given portfolio from the expected rate. The higher values show a larger risk, and low values indicate a lower inherent risk.Formula: How to Calculate VarianceWe have two different approaches to calculate the variance of returns −Probability ApproachHistorical ...
Read MoreHow are ordinary shares valued under no growth situation?
The present value (PV) of a stock with zero growth is derived by dividing dividends distributed per period by the required return in that certain period. The formula is not an exact or guaranteed approach for evaluating a stock’s value but is more of a theoretical approach.The PV of a stock is specific to stocks that have zero or no growth. It is important to note that the period used for dividends and that for the required return must match. For example, for annual dividends, yearly return must be used.As stated above, the PV formula is more of a theoretical ...
Read MoreHow to calculate Expected Rate of Return(ERR)
An investment’s “expected return” is the total money one can expect to lose or gain on an investment with a foreseeable rate of return. Basically, it lets one know whether the investment would be profitable providing enough money or it will be a loss, costing the investors’ money. By extension, it also tells one what kind of return you can expect when from a portfolio with a particular mix of investments.Understanding the Limits of Expected ReturnThe expected rate of return is more of a closer guess than a firm prediction. Regardless of whether you calculate the expected return of an ...
Read MoreWhat are Ordinary Shares?
Ordinary shares, also known as common shares, are used to raise capital for businesses. They are equity stocks that provide voting rights to the shareholders. Usually, dividends on ordinary shares are distributed according to the discretion of the management of the company that issues these shares. The dividends are distributed according to availability of profits. Common shares represent the ownership of shareholders in the company.ExplanationCommon shares provide the ownership rights to shareholders as per their number of shares the shareholders have. These shareholders have the right to voting and they are offered some privileges as an owner of a company. ...
Read More