Determine the most recent stock price and the total dividends paid over the past year.

The publicly traded company I chose for this discussion post was Verizon. As of 7/19/2022, the stock price was $50.45 USD, and the total dividends paid in 2021 were approximately $10.4 billion compared to $10.2 billion in 2020. The dividend payout was 2.0% more than the prior year and came in at $0.64/share (Verizon Communications Inc., n.d.).

Calculate the current dividend yield on the stock. Show your calculations of the dividend yield and required rate of return (Ke), and present the P/E ratio. Calculate the required rate of return (Ke) for an investment in the common stock. Identify the current P/E ratio for the company from a source such as Yahoo! Finance or Barron’s.

Current Dividend Yield on the stock = Annual Dividends / Share Price ($0.64 * 4 quarters = $2.56) $2.56 / $50.45 = 5.07%

Required rate of return = First Year Dividend / Common Stock Price + Growth Rate.

$0.64 / $50.45 + 5% = 6.27%

The required rate of return (Ke) for investment in Verizon’s common stock would be 6.27% (using the assumed growth rate of 5%).

The current P/E ratio for Verizon, according to Yahoo! Finance, is 9.82 (n.d.). The P/E ratio is calculated by dividing the share price by the earnings per share.

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.

The relationship between Verizon’s rate of return and the price-earnings ratio deals directly with the stock price. When the rate of return uses a higher stock price in the equation, the P/E ratio determines the value of the share of stock (Block et al., 2019).

This relationship indicates the risk of the company’s future cash flow by helping analyze the company’s growth and foreshadowing any future sales growth. Block et al. (2019) state that sales growth and earnings heavily impact the price-earnings ratio. In a study from 2021, it was noted that analysts assume an undervaluation if price-earnings ratios are historically low, which indicates a time of crisis (de Lima & de Camargos, 2021).

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.

The relationship between Verizon’s rate of return and price-earnings ratio reveals the commonality of low to low. When a low return rate is noted, a low P/E rate is also indicated. Therefore, generally, opposites in outcomes from these ratios are not supported by Verizon’s data.

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%.

If Verizon were to grow its dividends by a rate higher than 5%, the impact on the company’s stock price would also be significant. Rising at this rate would determine a rapidly growing company, according to Block et al. (2019).

Compare your company’s P/E ratio with the P/E ratios of two other companies in its industry.

AT&T Inc’s P/E ratio was 8.70 (Yahoo!, n.d.) T-Mobile’s P/E ratio was 60.02 (Yahoo!, n.d.)

For T-Mobile’s ratio, it seems they are not doing too well as a firm. Verizon has a healthy balance comparable to AT&T Inc’s ratio rather than T-Mobile’s ratio.

Hypothesize which company in this industry should have the lowest Ke based on the P/E comparisons.

When solely looking at the price-earnings ratio, the company with the lowest rate of return should be AT&T Inc, as the low price-earnings ratio is commonly associated with low price- earnings ratios. AT&T Inc has a slightly lower P/E rate than Verizon and would therefore have the lowest rate of return.

Summarize the connection between a company’s growth rate, its required rate of return, and

its value (stock price).

Our text lays out the connection between a company’s growth rate, rate of return, and stock price, stating that an increase in growth rate and constant rate of return would result in a company’s stock price also increasing (Block et al., 2019). These three company values are correlated to supply analysts and investors with important business and personal decisions.

References

Block, S. B., Hirt, G. A., & Danielsen, B. R. (2019). Foundations of financial management (17th ed.). McGraw-Hill Higher Education.

de Lima Amorim, D. P., & de Camargos, M. A. (2021). Mean reversion in a price-earnings ratio and under / overvaluation in the Brazilian stock market. Revista Contabilidade & Finanças – USP, 32(86), 301–313. https://doi.org/10.1590/1808-057×202111780

Verizon Communications Inc.. (n.d.). Retrieved July 20, 2022, from https://www.verizon.com/about/sites/default/files/2021-Annual-Report-on-Form-10-K.pdf (Links to an external site.)

Yahoo! (n.d.). AT&T Inc. (T) stock price, news, Quote & History. Yahoo! Finance. Retrieved July 19, 2022, from

https://finance.yahoo.com/quote/T?p=T&ncid=yahooproperties_peoplealso_km0o32z3jzm (Links to an external site.)