FIRM DIVIDEND EXPECTED NEXT YEAR DIVIDEND GROWTH RATE REQUIRED RETURN VALUE WITH PREVIOUS DIVIDEND VALUE WITH UPCOMING DIVIDEND A $1.20 8% 13% B $4.00 5% 15% C $0.65 10% 14% D $6.00 8% 9% E $2.25 8% 20% find the value (V0) of each of the five examples (A,B,C,D,E) shown in the table TWICE........once assuming that the dividend given in the second column is the previous dividend (D0) and again assuming that the dividend given in the second column is the upcoming dividend (D1). Assume the following: The dividends are paid semiannually. Use the dividend given as the semiannual amount. Do not divide the dividend amount by 2. The growth rate (g) shown in the table is annual. The required return (r) shown in the table is annual.
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.
|
FIRM |
DIVIDEND EXPECTED NEXT YEAR |
|
REQUIRED RETURN |
VALUE WITH PREVIOUS DIVIDEND |
VALUE WITH UPCOMING DIVIDEND |
|
A |
$1.20 |
8% |
13% |
|
|
|
B |
$4.00 |
5% |
15% |
|
|
|
C |
$0.65 |
10% |
14% |
|
|
|
D |
$6.00 |
8% |
9% |
|
|
|
E |
$2.25 |
8% |
20% |
|
|
|
|
|
|
|
|
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find the value (V0) of each of the five examples (A,B,C,D,E) shown in the table TWICE........once assuming that the dividend given in the second column is the previous dividend (D0) and again assuming that the dividend given in the second column is the upcoming dividend (D1).
Assume the following:
- The dividends are paid semiannually. Use the dividend given as the semiannual amount. Do not divide the dividend amount by 2.
- The growth rate (g) shown in the table is annual.
- The required return (r) shown in the table is annual.
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