University Finance Assignment: Stock Valuation and Analysis Report

This finance report delves into the topic of stock valuation, particularly focusing on companies that do not pay dividends. It begins by identifying industries where dividend payments are less common, explaining the rationale behind companies reinvesting earnings for growth rather than distributing dividends. The report then outlines specific factors investors consider when valuing such stocks, including earnings, future projects, and potential for capital appreciation. Several valuation techniques are discussed, such as shorting strategies, options contracts, and the dividend discount model. The report further illustrates these concepts by analyzing two publicly traded companies, Telstra Corporation Limited and BHP Group Limited, from different industries, and assessing their stock valuations using the dividend discount model. The analysis includes calculations and a comparison of the companies' current share prices to determine if they are overvalued or undervalued by the market.

Running head: FINANCE
FINANCE
Name of the Student:
Name of the University:
Author Note:

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Table of Contents
Industries not paying dividend...................................................................................................2
Specific factors used in valuation of stock.................................................................................2
Two publicly traded companies.................................................................................................3
References..................................................................................................................................4

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Industries not paying dividend
Dividends refer to a part of corporate earnings that are given to the shareholders of the
company. Dividends may be provided in different period and payout rates. In many
industries, companies did not pay dividends to their shareholders; instead, the company
reinvest whole amount of earnings in firm to increase the retained earnings portion of
business. Usually, a rapidly growing industry does not pay a dividend as according to them if
amount of profit is reinvested in business, then it will be profitable for the company and can
help in future growth and expansion of business (Baker & Weigand, 2015). Few companies
that comes under S&P 500 companies with no dividend are Amazon.Com Inc., Biogen Inc.
and many more. Developing a firm believe that if dividend is retained in the business, it will
ultimately increase the value of organization.
Specific factors used in valuation of stock
If a company is not paying dividend to its shareholders, the investors investing in
these type of companies will look into earnings of the firm and will try to measure whether
the company would be giving higher returns in future or not. Investors are interested to know
the future projects of company and identify whether specific projects are profitable for
business, then only they will make further investments in the company (Kaźmierska-Jóźwiak,
2015). Investors and lenders have a viewpoint that if dividends are not paid then, the firm
should yield higher returns by rising stock price. Many investors and creditors intends to
invest in companies that reflect an increasing profit in their financial statements and are less
concerned about the dividend. According to them if a firm is making a profit every year then
definitely, it will provide higher returns and investors can earn profits. There are specific
ways by which stocks can be valued if, the company does not pay a dividend, some of them
are as follows: stocks shorting technique can be used, where an investor can use long-term

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practice strategy to buy or sell an underlying asset, assuming that share prices might increase
over time. Call and put options contract can be used to derive value of underlying security.
Dividend discount model is one of the method of stock valuation that is used to value
inventory by taking the net present value of future dividends. The other name of this method
is Gordon Growth Model. Earning multiple model is calculated by dividing stock price by
earning per share. It is effective method of evaluating valuation of stock.
Two publicly traded companies
Telstra Corporation Limited and BHP Group Limited are two companies from
different industries that are taken into consideration. Telstra Ltd. is a telecommunication
industry and BHP Group is a metal and mining industry, both are publicly traded companies
located in Australia. Dividend Discount Model is used to evaluate whether the stocks are
overpriced or underpriced.
Telstra Ltd:
Ke = Rf + β(Rm – Rf)
Ke = 0.93% + 0.36 (6.29 – 0.93)
Ke = 2.85%
BHP Group:
Ke = Rf + β(Rm –Rf)
Ke = 0.93% + 0.90(6.29 – 0.93)
Ke = 5.75%
Particulars
Telstra
Ltd. BHP Group
d1 0.17 3.33
ke 2.86% 5.75%
g -0.10 0.051
P0 1.35 551.14
current share price 3.74 38.22
Overvalued Undervalued

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Due to excessive dividend given by BHP Group its P0 is coming to 551.14 which is very high
as compared to its current market price.

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References
Baker, H. K., & Weigand, R. (2015). Corporate dividend policy revisited. Managerial
Finance.
Kaźmierska-Jóźwiak, B. (2015). Determinants of dividend policy: evidence from polish listed
companies. Procedia economics and finance, 23, 473-477.