AU Financial Analysis and LinkedIn MBA Careers Discussion

Discussion Forum 1

Prior to beginning work on this discussion forum, read Chapter 10 in the textbook. 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 (K_e) because it’s risky will generally have a low P/E ratio. Similarly, a stock with a low required rate of return (K_e) 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,

• Watch the video, Dividend Discount Model (DDM) (Links to an external site.).
• 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 65 Best Dividend Stocks You Can Count On in 2021 (Links to an external site.).
• Determine the most recent stock price and the total dividends paid over the past year.
• Calculate the current dividend yield on the stock.
• Calculate the required rate of return (K_e) for an investment in the common stock. You should use formula 10-9 in the textbook to do this calculation and use an assumed growth rate of 5%.
• 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 (K_e), and present the P/E ratio.
• Explain the relationship between your chosen company’s K_e 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 K_e and a low P/E ratio (or low K_e 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 K_e 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).

Be sure to think strategically and apply the concepts from the course textbook.

Discussion Forum 2

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Your initial discussion thread is due on Day 3 (Thursday) and you have until Day 7 (Monday) to respond to your classmates. Your grade will reflect both the quality of your initial post and the depth of your responses. Refer to the Discussion Forum Grading Rubric under the Settings icon above for guidance on how your discussion will be evaluated.