Examine the following book-value balance sheet for University Products Inc. The preferred stock currently sells for $15 per share and pays a dividend of $3 a share. The common stock sells for $20 per share and has a beta of 0.7. There are 1 million common shares outstanding. The market risk premium is 9%, the risk-free rate is 5%, and the firm’s tax rate is 21%. BOOK-VALUE BALANCE SHEET (Figures in $ millions) Assets Liabilities and Net Worth Cash and short-term securities $ 3.0 Bonds, coupon = 7%, paid annually (maturity = 10 years, current yield to maturity = 9%) $ 10.0 Accounts receivable 5.0 Preferred stock (par value $20 per share) 3.0 Inventories 9.0 Common stock (par value $0.10) 0.1 Plant and equipment 20.0 Additional paid-in stockholders’ equity 16.9 Retained earnings 7.0 Total $ 37.0 Total $ 37.0 a. What is the market debt-to-value ratio of the firm? b. What is University’s WACC?
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.
Examine the following book-value
| BOOK-VALUE BALANCE SHEET | ||||||||
| (Figures in $ millions) | ||||||||
| Assets | Liabilities and Net Worth | |||||||
| Cash and short-term securities | $ | 3.0 | Bonds, coupon = 7%, paid annually (maturity = 10 years, current yield to maturity = 9%) |
$ | 10.0 | |||
| Accounts receivable | 5.0 | Preferred stock (par value $20 per share) | 3.0 | |||||
| Inventories | 9.0 | Common stock (par value $0.10) | 0.1 | |||||
| Plant and equipment | 20.0 | Additional paid-in |
16.9 | |||||
| 7.0 | ||||||||
| Total | $ | 37.0 | Total | $ | 37.0 | |||
a. What is the market debt-to-value ratio of the firm?
b. What is University’s WACC?
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