Assume that IWT has completed its IPO andhas a $112.5 million capital budget planned forthe coming year. You have determined that itspresent capital structure (80% equity and 20%debt) is optimal, and its net income is forecastedat $140 million. Use the residual distributionapproach to determine IWT’s total dollar distribution. Assume for now that the distributionis in the form of a dividend. Suppose IWT has100 million shares of stock outstanding. Whatis the forecasted dividend payout ratio? What isthe forecasted dividend per share? What wouldhappen to the payout ratio and DPS if net incomewere forecasted to decrease to $90 million? Toincrease to $160 million?
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.
Assume that IWT has completed its IPO and
has a $112.5 million capital budget planned for
the coming year. You have determined that its
present capital structure (80% equity and 20%
debt) is optimal, and its net income is
at $140 million. Use the residual distribution
approach to determine IWT’s total dollar distribution. Assume for now that the distribution
is in the form of a dividend. Suppose IWT has
100 million shares of stock outstanding. What
is the forecasted dividend payout ratio? What is
the forecasted dividend per share? What would
happen to the payout ratio and DPS if net income
were forecasted to decrease to $90 million? To
increase to $160 million?
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