Reference no: EM133928725

Question: 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 is 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.

Initial Response:

For this discussion forum,

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 Best Dividend Stocks for Dependable Dividend Growth.
Determine the most recent stock price and the total dividends paid over the past year.
Calculate the current dividend yield on the stock. Get expert online assignment help in the USA.
Calculate the required rate of return (Ke) for an investment in the common stock. You should use formula 10-9 in the textbook (SEE PICS) for this calculation and use an assumed growth rate of 5 percent.
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 Ke and 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).