Determine the amount which must be raised from the issue of new equity in order to finance the investment opportunities while maintaining the current capital structure? Find the after-tax cost of 2021 retained earnings and of new ordinary share capital if raised? Assume that the current yield on long-term government bond is 9% and the market risk premium is 7%. The firms equity beta is 0.95 and the current yield on a one-year government treasury bill is 8%. Use capital asset pricing model (CAPM) to determine the firm cost of capital? Calculate the appropriate the weighted-average cost of capital that should be used in the evaluation of the investment opportunities. Use CAPM to determine cost of equity?
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.
Jay Limited is evaluating investment opportunities with similar expected returns, which will require a total of N$35 million to finance. Last year (2020), a dividend of N$6 per share was paid. At present the shares are quoted at N$60 per share. A dividend growth of 9% per annum is expected for the foreseeable future. The company would realize N$60 per share on the new issue but would have to pay floatation cost of N$5 per share. In addition, 13% preference shares or 11% debentures could be issued. Any debenture issued would be offered at face value.
The following are the extract from the 2020 financial statements. These capital structure is based on book values and is considered optimal by the board of directors.
|
Ordinary share capital |
N$ 23 000 000 |
|
Retained Earnings |
N$ 7 000 000 |
|
Total equity |
N$ 30 000 000 |
|
|
N$ 9 000 000 |
|
Debenture (9% p.a) |
N$ 21 000 000 |
|
Total capital employed |
N$ 60 000 000 |
Assume that the tax rate is 30%.
Required:
- Determine the amount which must be raised from the issue of new equity in order to finance the investment opportunities while maintaining the current capital structure?
- Find the after-tax cost of 2021 retained earnings and of new ordinary share capital if raised?
- Assume that the current yield on long-term government bond is 9% and the market risk premium is 7%. The firms equity beta is 0.95 and the current yield on a one-year government treasury bill is 8%. Use
capital asset pricing model (CAPM) to determine the firm cost of capital? - Calculate the appropriate the weighted-average cost of capital that should be used in the evaluation of the investment opportunities. Use CAPM to determine
cost of equity ?
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