Himanshu wants to buy Abhishek Industires stock and hold on it for five years. He estimates that Rs 4.05 dividend would be paid by the company continuously for the next five years. He hopes to sell the shares at Rs 75 at the end of the fifth year. If his required rate of return is 10%, then what price he should pay at present?
An investor owns the share of Natural Waters Ltd., whose current cash dividend id Rs 3. The constant growth rate in dividend is 16 percent per year and the required rate of return is 20 percent. What is the value of the company’s share?
P/E multiples for a share may be equated with projected growth rate in earnings. If PEG (P/E to growth ratio) is greater than one, then stock is overvalued. The basic problem with this rule of thumb is that it ignores the required rate by investor.
P/E multiple would be inverse of prime interest rate. It assumes that there is no relationship between prime interest rate and the level of corporate earnings. This assumption always does not hold good as the prime interest rate depends upon inflation rate, which also affects corporate earnings.
P/E multiple would be inverse of real rate of required by the investor. This rule protects the value of equity in face of inflation, i.e., equity income is suppose to rise in nominal terms in such a way that its real value is unimpaired.