Analyst forecasts of earnings per share (EPS) and dividends per share (DPS) for IMD Ltd. over the next two years are as follows: 2022 E $2.00 DPS = $2.25 DPS = EPS = $10.00 EPS = $11.00 2023 E Analysts have also confirmed that IMD has a current book value of $20 per share, the beta on its common shares is 1.25, the current market price of risk is 6%, and the risk-free rate is 3%. Based on these inputs and using the abnormal earnings valuation model, what is the intrinsic value of IMD's common shares assuming that abnormal earnings will grow at an average rate of 2% after 2023 and the number of common shares outstanding will not change? (Calculate abnormal earnings to 2 decimal places only) O 1. $283.93 2. $112.96 3. $92.96 O 4. $111.41
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
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