acob PLC is listed on the Stock Exchange. Analysts estimate the stock’s equity beta to be at 2.17. The S&P 500 Index is expected to earn a return of 15 percent per annum. The T-bill rate is at 5 percent per annum. The expected cashflows of the two projects are as shown on the table. The firm plans to invest in one of two mutually exclusive projects P or Q where both project is the same risk as the firm’s other assets. Required: (a) Calculate the company shareholders’ required return. (b) Using the net present value approach, which project should Yulbury plc accept? Assume the discount rate to be the cost of equity capital. (c) The two projects have the same project beta, being 1.52. Derive the projects’ required return and advise on project selection using the net present value and the discounted payback period approaches.
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.
Jacob PLC is listed on the Stock Exchange. Analysts estimate the stock’s equity beta to be at 2.17. The S&P 500 Index is expected to earn a return of 15 percent per annum. The T-bill rate is at 5 percent per annum.
The expected cashflows of the two projects are as shown on the table. The firm plans to invest in one of two mutually exclusive projects P or Q where both project is the same risk as the firm’s other assets.
Required:
(a) Calculate the company shareholders’ required return.
(b) Using the
(c) The two projects have the same project beta, being 1.52. Derive the projects’ required return and advise on project selection using the net present value and the discounted payback period approaches.
(d) Assume that the general inflation rate has risen by 25 percentage points. Discuss the impact of this on the cost of equity, the after-tax weighted average cost of capital and on project selection. No calculations are required here.
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