Assume that last year, Coca-Cola paid a dividend of 1.10 and it currently trades

Question

Assume that last year, Coca-Cola paid a dividend of 1.10 and it currently trades for $41.00. Assume the dividend continues to grow at 10% annually. Write a one page paper explaining the following: 1) Compute the required return (formula 10-10, p. 302) and explain what this formula is calculating and why it might be used. 2) Using the dividend valuation model (formula 10-9, p. 300) what is the current value of KO based on the dividend valuation model? Explain this form of valuation and how does this calculated price compare to the current price of $41.00? 3) Based on the calculations and the actual trading price, would you suggest that the company is overvalued, undervalued or appropriately valued? Explain your reasoning in detail. 4) Based on the current dividend ($1.10), what is the dividend yield? How does the dividend yield relate to the growth of the stock?

Explanation / Answer

dividend yield denotes the periodic return earned on investment in shares and decides the growth of returns on investment

dividend declared 1.1 growth rate 10% expected dividend 1.21 price 41 answer A cost of equity expected dividend/ market price )+g 0.1295122 12.95122 this formula is calculating the minimum required return on equity shares B value of bond expected dividend/cost of equity - growth rate 41 current market price and price calculated should be compared to know the valuation of stock C company is correctly valued as market price is equal to price of dividend valuation model D dividend yield dividend/market price 0.0268293 2.682927 percent

dividend yield denotes the periodic return earned on investment in shares and decides the growth of returns on investment

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