Question

QUE (1a) Goodstuff Corporation has total equity of $500 million and 100 million shares outstanding. Its ROE is 15%, The dividend payout ratio is 33.3%. Calculate the company’s dividends per share (round to the nearest penny)

           (1b) Investor expects that Amalgamated Aircraft parts, Inc, will pay a dividend of $ 2.50 in the coming year. Investors require a 12% rate of return on the company’s shares, and they expect dividends to grow at 7% per year . Using the dividend valuation model, find the intrinsic value of the company’s common shares

            (1c) Briefly define each of the following terms and describe how it can affect investors decision.

(i) Loss aversion

                 (ii) Representativeness

                 (iii) Narrow framing

                   (iv) Overconfidence

(v)    Biased self – attribution.

Answer 1

Following are the calculations for the first part.

ROE = Net income / Total equity

We calculate the net income through this formula, then the dividends by multiplying the DP Ratio to net income and then dividing by no of shares o/s to get dividend per share.

1b. For this we'd use the gordon growth model. which is,

We have to simply put in the value to get the intrinsic value, which is.

1c. (i) loss aversion refers to people's tendency to prefer avoiding losses to acquiring equivalent gains.

(ii) Representative bias occurs when the similarity of objects is confused with the probability of an outcome, meaning people incorrectly believe that two common-sounding events are believed to be more closely correlated than they are.

(iii). an investor is said to suffer from narrow framing if he seems to make investment decisions without considering the context of his total portfolio

(iv) Overconfidence is when the investor is truly overconfident about his stock picks, positions and trades and believes he is superior than everyone.

(v) The self-attribution bias is a habit of attributing favourable outcomes to expertise and unfavourable outcomes to bad luck or an exogenous event.