At the end of the year 2020 Brown Bear Corporation paid dividends $3.39 per share. The company projects the following annual growth rates in dividends: Year Growth Rate 2021 13% 2022 13% 2023 13% 2024 11% 2025 6% 2026 4% From year 2027 onward growth in dividends is expected to remain constant at 3% per year. The required rate of return for this stock is 12.16%. Calculate the economic value of the stock now (end of the Year 2020).
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.
At the end of the year 2020 Brown Bear Corporation paid dividends $3.39 per share. The company projects the following annual growth rates in dividends:
Year Growth Rate
2021 13%
2022 13%
2023 13%
2024 11%
2025 6%
2026 4%
From year 2027 onward growth in dividends is expected to remain constant at 3% per year. The required
Calculate the economic value of the stock now (end of the Year 2020).
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