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.
TAB just paid $0.78 dividend. You also expect TAB's per share dividend to grow by 11 percent per year for the next three years. After that you expect dividend growth to diminish by two and half percent each year for the subsequent three years. However, after that you think the dividend will grow at two percent thereafter. You have just calculated TAB company's required return. Now you are trying to determine how much you will pay for TAB company's stock if current risk-free rate is 1.1%, company's beta is 1.05 and market risk premium is 7.00 % How much would you pay for TAB company's stock?
To “show your work” – show your calculations either using formulas or financial calculator.
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