Dividend Discount Model (DDM)

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Prior to beginning work on this discussion forum, read Chapter 10 in the textbook. The value of a common stock is based on the present value of the future cash flows that will accrue to that stock. Of course, the present value calculation necessarily involves the use of a required rate of return (a discount rate) which reflects the risk. The textbook indicates that “To some extent, the two concepts of P/E ratios and dividend valuation models can be brought together. A stock that has a high required rate of return (Ke) because it’s risky will generally have a low P/E ratio. Similarly, a stock with a low required rate of return (Ke) because of the predictability of positive future performance will normally have a high P/E ratio” (Block et al, p. 322). In this discussion, you will examine the relationship between a stock’s required rate of return and its P/E ratio.

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For this discussion forum,

Watch the video, Dividend Discount Model (DDM) (Links to an external site.).
Select a publicly traded company that pays dividends. You may select any publicly traded company that pays dividends, or choose one of the companies discussed in 65 Best Dividend Stocks You Can Count On in 2021 (Links to an external site.).
Determine the most recent stock price and the total dividends paid over the past year.
Calculate the current dividend yield on the stock.
Calculate the required rate of return (Ke) for an investment in the common stock. You should use formula 10-9 in the textbook to do this calculation and use an assumed growth rate of 5%.
Identify the current P/E ratio for the company from a source such as Yahoo! Finance or Barron’s.
In your post,

Show your calculations of the dividend yield and required rate of return (Ke), and present the P/E ratio.
Explain the relationship between your chosen company’s Ke and P/E ratio and what that relationship indicates about the risk of the company’s future cash flows.
Explain whether the general relationship between a high Keand a low P/E ratio (or low Ke and high P/E ratio) is supported by the data for your chosen publicly traded company.
Predict the impact on the company’s stock price based on your forecast that the company will grow its dividends by a rate higher than 5%.
Compare your company’s P/E ratio with the P/E ratios of two other companies in its industry.
Hypothesize which company in this industry should have the lowest Ke based on the P/E comparisons.
Summarize the connection between a company’s growth rate, its required rate of return, and its value (stock price).

 

Sample Solution

understand the ‘scam’, we first need to know what the SSC is and what its functions are –

To the uninitiated, the Staff Selection Commission is an autonomous body falling under the Department of Personal and Training that is tasked with conducting examinations for the recruitment of non-gazetted staff to Group ‘ C ’ (Class III) and Group ‘ B ’ posts in a no of central government ministries and departments as well as subordinate offices.

The SSC was established on 4th November 1975. It was first established as the Sub-ordinate Services Commission and was later renamed the Staff Selection Commission on 26th September 1977. The commission constitutes a chairperson (As himKhorana), 2 members, and a secretary-cum-controller of exams.

Among the posts the aspirants take the SSC exam for are lower division clerks, stenographers, central excise inspectors, income tax inspectors, and sub-inspectors working for the CBI and central police organisations.

While it conducts a no of exams, the most significant one, which attracts the max no. of aspirants as well, examination.

What Is the ‘Scam’ All About?

The SSC ‘scam’, which has come to the spotlight in the last few days, pertains to the Tier II CGL exam , which was held across the country from 17th Feb to 22 Feb, with 1,89,843 aspirants appearing to fill 9,372 vacancies.

Barring the cancellation of the second shift of the exam on 17th February at the Animate InfoTech Centre in Delhi owing to an attempt to disrupt it by “some unruly elements,” the examination seemed to have been conducted smoothly.

However, on 21st February, several irregularities were reported in centres across the country — starting with technical glitches which delayed the examination for the 33,075 candidates who were appearing for it (on the day).

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