Question

Understand how to properly find the value of a stock using the dividend growth rate is a fundamental building block in valuation. Using two companies, Wal-Mart and Sears calculate growth rate evaluate each stock using a constant dividend growth model.

Calculate the future growth rate for both companies.
Which stock has the better growth rate? Do you agree with this assessment? Explain. Support your answer with either a description of a new product growth or from past growth performance.
Calculate the future stock price for both companies.
From a time value of money point of view stand point what does the calculated stock price say about the market’s view on the time value of money for each stock?
Compare the calculated stock price with the current stock price for both companies.
Is either stock underpriced or overpriced? Explain.
Should an investor purchase either of those stocks?
Should one stock outperform the other?
Based on the ratings found in Phase 4, does one stock seem more financially healthy? Explain.
Does this financial health make a stronger case to invest in the stock? Explain.

Zero-Growth Model
The simplest approach to dividend valuation, the zero-growth model, assumes a constant, nongrowing dividend stream.

Example:
Issue date
IPO - Initial Purchase Offer

P(0) = D(1) / r(s)

D(1) = $1.50
r(s) = .05 or 5%

$10
$30

Constant Growth Model Example:
Issue date
IPO - Initial Purchase Offer

P(0) = D(1) / r(s)

D(1) = $1.50
r(s) = .05 or 5%
g = .03 or 3%

Solution Preview

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Introduction
The company selected here to do the stock analysis using constant dividend growth rate is Wal-Mart and the Sears. Both are retail giant of USA with presence in early all big countries. The size of Wal-Mart is much bigger than the size of Sears. This report is written to do the analysis on the stock price and to find out which is more sustainable.
Analysis as per Constant Dividend Growth rate Model

Gordon constant growth dividend model is one of the important and simple tools to do analysis of the stock price of the company. It is given by:
Stock price P = Div (1+g)/(r-g)
Where P = stock price
D= current dividend
g = growth rate
r = cost of equity
The two important thing to calculate stock price using this model is growth rate and cost of equity. Let’ s first calculate the growth rate using
g = ROE *(1- Dividend yield)...

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