question archive You own 1,000 shares of EcoFit stock 3 years ago at Tk
You own 1,000 shares of EcoFit stock 3 years ago at Tk
Subject:FinancePrice:3.86 Bought30
You own 1,000 shares of EcoFit stock 3 years ago at Tk.42 per share. Currently the stock price is Tk.72
per share. You are considering purchase another 1,000 shares of the stock if the market price is
favourable. However, if the price is not in your favour to buy the shares, you would sell the existing
shares that you own. After a preliminary screening of the information available for finding out the value
of the stock, you are satisfied that the dividend valuation model can be applied for the purpose.
The EcoFIt stock paid relatively high rate of dividends from years 2001 through 2014 growing at about
12 percent per year. However as the industry that EcoFit is in entered the maturity stage of its life cycle,
the dividend growth rate appeared to decline. The company paid the following dividends per share from
2015 through 2020.
Year Dividend per share (Tk.)
2015 5.60
2016 5.95
2017 6.10
2018 6.45
2019 6.85
2020 7.20
You believe that the growth rate of dividend from 2015 through 2020 will continue into in definite
future.
The current market capitalisation rate (market return) at the exchange where EcoFit stock is traded is 12
percent. The risk-free securities that are available to you for investment have been providing an average
of 7 percent return over the last 5 years. The beta coefficient associated with EcoFit stock is 0.48.
Based on the information that you have gathered, will you buy 1,000 additional shares of the stock or
sell the 1,000 shares that you currently own?
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The current divident yield of the stock is 10% (7.2 /72). Future prospects from 2015 to 2020 based on expected dividend appears to be growing into future. The average rate of growth in dividient b/w 2015 and 2020 is 5%. Capitalization rate which is cost of equity is 12%. We could use the Gordon model to assess the value. From the table below, 108 is the valued price v/s current price of 72. The stock is undervalued and could be bought.
| 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | |
| Dividend | 5.6 | 5.95 | 6.1 | 6.45 | 6.85 | 7.2 | 7.56 |
| YoY Growth of Divident | 6% | 3% | 6% | 6% | 5% | ||
| Avg growth | 5% | 5% | |||||
| Capitalization rate | 12% | ||||||
| Valued Price | Dividend / (cost of equity - growth rate) | ||||||
| Divident future year | 7.56 | ||||||
| Cost of equity | 12% | ||||||
| Growth | 5% | ||||||
| Valued price | 108 |
Further the risk free rate of 7% is lower than the current dividend yield 10%.
As such 1000 shares could be bought in order to earn a) better than risk free rate and b) growing dividend yield outlook.
