General Forge and Foundry Corporation currently has no debt in its capital structure, but it is considering adding some debt and reducing the percentage of outstanding equity in its capital structure. The firm's current (unlevered) beta is 1.15, and its cost of equity is 11.55. Because the firm has no debt in its capital structure, its weighted average cost of capital (WACC) also equals 11.55. The risk-free rate of interest (TRP) is 3.5%, and the market risk premium (RPM) is 7%. General Forge's marginal tax rate is 30%. General Forge is examining how different levels of debt will affect its costs of debt and equity, as well as its WACC. The firm has collected the financial information that follows to analyze its WACC. Complete the following table. Market debt to Market debt to equity ratio ( equity ratio ( Market debt to equity ratio ( wa) w₁) D/S) Bond Rating Before-Tax Cost of Debt ( Ta) Levered Beta (b) Cost of Equity ("1) WACC 0.0 1.0 0.00 1.15 11.55% 11.55% 0.2 0.8 0.25 8.10% 12.95% 11.49% 0.4 0.6 0.67 BBB 8.50% 1.69 15.33% 0.6 0.4 1.50 BB 10.90% 2.36 12.59% 0.8 0.2 C 13.90% 4.37 34.09%
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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