Josef Robien CFA is valuing the common stock of British Cornuopia Bank (BCB). In this effort, Robien has made the following assumptions • EPS will be 20% of the beginning book value per share for each of the next 3 years • Book value per share is estimated at $10.62 on December 31, 2013 • BCB will pay cash dividends equal to 40% of earnings per share (EPS) • At the end of 3 years, BCB’s common stock will trade at 4 times its book value • Beta for BCB is 0.7, the risk free rate is 4.5% and the equity risk premium is 5% Calculate the value per share of BCB stock using the Residual Income Model
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.
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 2 images
