Problem
A. The current price of SPY is $380.50. Over the past 12 months, the SPY has paid $6.2 in dividends per share. What is the trailing twelve month dividend yield for SPY?
B. In recent history, dividends have grown about 6% per year for SPY. Using the Gordon Growth Model, and assuming this dividend growth rate continues, what is the discount rate implied by the current price?
C. The risk free rate (yield on US Treasuries) is now approximately 4%. Using the CAPM, what is the implied market risk premium in the discount rate you just found?
D. Firms may return cash to their shareholders by dividend payments or by stock buybacks. Recently, stock buybacks have grown to be much larger than dividend payments. Therefore, the dividend payments alone (the $6.2 over the last twelve months reported above) may not accurately represent the true yield investors receive by owning the asset. Assume that total payout is actually twice the dividend amount and that total payout also grows at 6% per year, what is the implied market risk premium given the current market price?
E. Based on the calculations above, answer the following two things:
a. Whether or not the stock market is appropriately valued at the moment.
b. Whether or not the Gordon Growth model is an appropriate way to value the stock market.