ABC company has a dividend payout ratio of 40% and has maintained this payout ratio for several years. The current dividend per share of the company is 60p per share, and it expects that its next dividend per share, payable in one year’s time, will be 65p per share.The capital structure of the company is as follows(image attached).Bond A will be redeemed at nominal value in ten years’ time and pays annual interest of 10%. The cost of debt of this bond is 11.5% per year. The current ex-interest market price of the bond is £96.02. Bond B will be redeemed at nominal value in four years’ time and pays annual interest of 7%. The cost of debt of this bond is 7.5% per year. The current ex-interest market price of the bond is £105.04. ABC has a cost of equity of 15%. Ignore taxation.Calculate the following: 1. Ex-dividend share price, using the dividend growth model. 2. Capital gearing (debt divided by debt plus equity) using market value. 3. Market value weighted average cost of capital.Having undertaken your calculations, you should discuss what these calculations tell us about the health of ABC company and how these results may affect future decision-making within the company.
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
ABC company has a dividend payout ratio of 40% and has maintained this payout ratio for several years. The current dividend per share of the company is 60p per share, and it expects that its next dividend per share, payable in one year’s time, will be 65p per share.The capital structure of the company is as follows(image attached).Bond A will be redeemed at nominal value in ten years’ time and pays annual interest of 10%. The cost of debt of this bond is 11.5% per year. The current ex-interest market price of the bond is £96.02. Bond B will be redeemed at nominal value in four years’ time and pays annual interest of 7%. The cost of debt of this bond is 7.5% per year. The current ex-interest market price of the bond is £105.04. ABC has a
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by Bartleby ExpertABC company has a dividend payout ratio of 40% and has maintained this payout ratio for several years. The current dividend per share of the company is 60p per share, and it expects that its next dividend per share, payable in one year’s time, will be 65p per share.The capital structure of the company is as follows(image attached).Bond A will be redeemed at nominal value in ten years’ time and pays annual interest of 10%. The cost of debt of this bond is 11.5% per year. The current ex-interest market price of the bond is £96.02. Bond B will be redeemed at nominal value in four years’ time and pays annual interest of 7%. The cost of debt of this bond is 7.5% per year. The current ex-interest market price of the bond is £105.04. ABC has a
Having undertaken your calculations, you should discuss what these calculations tell us about the health of ABC company and how these results may affect future decision-making within the company.
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