allowed to deduct interest payments as an expense. Corporations Corporations stockholders as an expense. The differential tax treatment of interest payments and dividend payments encourages firms to use capital structure. Debt financing is expensive than common or preferred stock financing. Blue Ram Brewing Company currently has no debt in its capital structure, but it is considering using some debt and reducing its outstanding equity. The firm's unlevered beta is 1.05, and its cost of equity is 12.43%. Because the firm has no debt in its capital structure, its weighted average cost of capital (WACC) also equals 12.43%. The risk-free rate of interest (TRF) is 3.5%, and the market risk premium (RPM) is 8.5%. Blue Ram's marginal tax rate is 25%. Blue Ram is examining how different levels of debt will affect its costs of debt and equity, as well as its WACC. The firm has collected the financial information that follows to analyze its weighted average cost of capital (WACC). Complete the following table. D/Cap Ratio 0.0 0.2 0.4 0.6 0.8 E/Cap Ratio 1.0 0.8 0.6 0.4 0.2 D/E Ratio 0.00 0.25 0.67 1.50 Bond Rating - A BBB BB C Before-Tax Cost of Debt (ra) allowed to deduct dividend payments to in their 7.2% 7.7% 8.9% 11.9% Levered Beta (b) 1.05 1.575 2.231 4.200 Cost of Equity ( Ts) 12.43% 14.100% 16.888% 39.200% WACC 12.43% 12.360% 12.991%
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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