Access to the financial market is challenging. SEF Corporation is considering a new debt-equity mix to save on cost of funds. The following capital structure is given for the company: Bonds, 7% Preferred Stock, P50 Common Stock Retained Earnings Calculate the following: (a) The cost of debt P 3,000,000 2,400,000 3,600,000 3,000,000 Dividends on common stock are currently at P30 per share and are expected to grow at a constant rate of 6 percent. Market price per share of common stock is P400, and the preferred stock is selling at P500. Flotation cost on new issues of common stock is 10 percent. The interest on bonds is paid annually. The company's tax rate is 40 percent. (b) The cost of preferred stock (c) The cost of retained earnings (internal equity) P12,000,000 (d) The cost of new common stock (external equity) (e) The weighted average cost of capital considering all four sources of funds What is the least costly capital structure for the company? Explain.
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.
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