Blue Plc has 150 million ordinary shares in issue that have a nominal value of £1 each and a market value of £1.06 each. The company has just paid an annual dividend of 10p. It has a payout ratio of 80% and in recent years has been able to maintain a return on equity funds (ROE) of 30%. Blue Plc also has 120 million preference shares in issue that pay a fixed dividend of 6p per year. Finally Blue Plc has 555,000, 6.5% coupon bonds in issue, each bond has a face value of £100, a yield to maturity of 4.5% and has exactly 5 years left until maturity. The current rate of corporation tax is 30%. a) Calculate the cost of capital on the equity for Blue Plc. b) Calculate the total value of the debt (bonds) of Blue Plc. c) If the cost of capital on the preference shares of Blue Plc is 7.5%, calculate the total market value of the company. Calculate the weighted average cost of capital (WACC) for Blue Plc. (p
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.
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