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: see IMAGE £m £m Equity Ordinary shares (nominal value £1 per share) 30 Reserves 30 60 Debt Bond A (nominal value £100) 30 Bond B (nominal value £100) 15 45 105 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. Required: part 1 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. Part 2 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.
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: see IMAGE
£m £m
Equity Ordinary shares (nominal value £1 per
share) 30 Reserves
30
60
Debt
45
105
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
Required: part 1
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.
Part 2
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.
Step by step
Solved in 4 steps with 2 images
