Once in a while iMOBHQ.COM post some information that may help other investors manage their portfolios better.  There are different types of financial models out there; but one that may interest investors that are used by portfolio managers is the Dividend Discount Model. 

The dividend discount model will only work for stocks that are contsantly paying dividends to it's investors.  The dividend models goes as follows:


Target Price = ((Yearly Dividend) X (1 + Growth Rate)) / (Required Return - Growth Rate)

Where Growth Rate is:

Growth Rate = Sustainable Growth = (ROE) X ((EPS - Dividend)/EPS)

Retention Ratio = Plowback Ratio = ((EPS-Dividend)/EPS) = (1 - Payout Ratio)

Where:
ROE = Return on Equity
EPS = Earnings Per Share

Example Data:

Description	Company  Information
Dividend	1,75
Required Return	10%
Dividend Yield (EPS-Dividend)/(EPS)	5.20%
ROE	15.67%
EPS	2.66
Target Price (Estimated Stock Price)	39.74

All of these information are readily available from websites like Yahoo, MSN, and Google.  You can also find these information from the SEC Filings of the company or the company's website under Investor Relations.

After calculating the target price of the stock, investors should compare the target price with the current price of the stock.  If the Target Price is higher than the current price, that means investors should buy the stock.  If Target Price is lower than the current price, investors should not buy the stock.  Investors should also take into consideration the brokerage fees and taxes in calculating their returns and breakeven point.  Just a note of caution that to apply the Dividend Discount Model investors should be aware that the amounts used in calculating the above amounts and ratios are from passed transactions, so investors should also take into consideration other factors like recent company news, economic trends, market trends and other factors that may affect the stock in the future.  The module will only give you a starting point.

DISCLAIMER:  This article is posted on the iMOBHQ website for the benefit of iMOBHQ.COM's investors and Portfolio Managers.  iMOBHQ.COM, it's partners and owner is not liable to any losses incurred by our site visitor's reliance to the information posted.