Bigbee Company currently has no debt; it is 100% equity financed. With its current capital structure, the stockAc€?cs beta is 1.5. The company is looking to take on some debt to buy back some stock, but management is unsure of how much debt to issue. You have been asked to calculate the optimal capital structure. The company is experiencing zero growth, and that will continue for the foreseeable future; therefore, there is no immediate need to retain any earnings. All of its earnings are given out in dividends. The companyAc€?cs tax rat is 40%. The risk free rate is 6% and the market risk premium is 4%.
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.
Captial Stucture
Bigbee Company currently has no debt; it is 100% equity financed. With its current capital structure, the stockAc€?cs beta is 1.5. The company is looking to take on some debt to buy back some stock, but management is unsure of how much debt to issue. You have been asked to calculate the optimal capital structure.
The company is experiencing zero growth, and that will continue
for the foreseeable future; therefore, there is no immediate need
to
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 2 images
