What about the value of a stock that does not pay dividends and is not expected to do so for the foreseeable future?
The D&E approach can be used.
Value of a share of stock
= Present value of future dividends + Present value of the price of the stock at the date of sale.
Using the above equation, simply set all dividend to 0.
The computed value of the stock would come solely from its projected future price.
The value of the stock will equal the present value of its price at the end of the holding period.
Example:
Stock XYZ pays no dividends.
Investment period 2 year holding period.
Estimates this stock to trade at around $70 a share at end of this period.
Required rate of return 15%.
Using a 15% required rate of return, this stock would have a present value of
= $70 / (1.15^2)
= $52.93
This value is the intrinsic value or justified price of the stock.
So long as it is trading for around $53 or less, it would be a worthwhile investment candidate.
The D&E approach can be used.
Value of a share of stock
= Present value of future dividends + Present value of the price of the stock at the date of sale.
Using the above equation, simply set all dividend to 0.
The computed value of the stock would come solely from its projected future price.
The value of the stock will equal the present value of its price at the end of the holding period.
Example:
Stock XYZ pays no dividends.
Investment period 2 year holding period.
Estimates this stock to trade at around $70 a share at end of this period.
Required rate of return 15%.
Using a 15% required rate of return, this stock would have a present value of
= $70 / (1.15^2)
= $52.93
This value is the intrinsic value or justified price of the stock.
So long as it is trading for around $53 or less, it would be a worthwhile investment candidate.
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