Assume today is December 31, 2019 Imagine works Inc just paid a dividend of 51.40 end of 2019. at 12% The dividend is expected to grow. per year for 3 years after which time it is expected to grow at a constant rate of 3.5%. amually. The company's cost of equity (rs) is 9,5%. Using the dividend Gowth model Callstwies for non constant growth)
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.
The value of a share of common stock is equal to the present value of all future cash flows (dividends) that it is expected to provide and present value of terminal value.
Stock price today = PV of all dividends + PV of terminal value
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