International Inc. is an outdoor furniture company that is planning to considerably grow over the coming years. Gaining very good reputation with its high-quality products , the company is projecting that it can grow at 10% over the coming 4 years and then the growth rate will decrease to 3% thereafter. Its earning per share (EPS) this year was $4 and the company,s dividend pay-out ratio was 30% that is its most recent dividends was $1.2. In order to finance this growth, the company needs to invest in new machinery and working capital. 1) If the company chooses to raise equity, what would be the expected price/share given the projected growth rates and given that the expected return on the company,s equity is 15% (assume the company uses the dividend discount model). 2) If the company instead decides to take an amortizing loan from its bank, the maximum loan value would be $10M which will be just enough to finance the necessary expansion. If the Annualized Percentage Rate (APR) that the bank offers is 11% compounded semi-annually, and the loan repayment will be monthly over 10 years. What is the effective annual rate (EAR) of this loan? 3) What is the monthly rate that will be used in calculating the loan interest payments? 4) What is the total payment that the company will have to pay per month?
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.
International Inc. is an outdoor furniture company that is planning to considerably grow over the coming years. Gaining very good reputation with its high-quality products , the company is projecting that it can grow at 10% over the coming 4 years and then the growth rate will decrease to 3% thereafter. Its earning per share (EPS) this year was $4 and the company,s dividend pay-out ratio was 30% that is its most recent dividends was $1.2. In order to finance this growth, the company needs to invest in new machinery and working capital.
1) If the company chooses to raise equity, what would be the expected price/share given the projected growth rates and given that the expected return on the company,s equity is 15% (assume the company uses the
2) If the company instead decides to take an amortizing loan from its bank, the maximum loan value would be $10M which will be just enough to finance the necessary expansion. If the Annualized Percentage Rate (APR) that the bank offers is 11% compounded semi-annually, and the loan repayment will be monthly over 10 years. What is the effective annual rate (EAR) of this loan?
3) What is the monthly rate that will be used in calculating the loan interest payments?
4) What is the total payment that the company will have to pay per month?
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