ou are asked to analyze The Haus of Us, a local manufacturer of house decor and accessories. Last year, the company distributed P2.00 per share dividend. The company has a beta of 1.2, the risk market return of 13% and the risk free rate of 6%. Required: Assume that the company is expected to experience a variable growth of 30% for the first year; 20% for the succeeding 2 years; 10% for the next 2 years; then to return to its growth rate of 8% to infinity. What is the value of the stock under this condition?
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.
You are asked to analyze The Haus of Us, a local manufacturer of house decor and accessories. Last year, the company distributed P2.00 per share dividend. The company has a beta of 1.2, the risk market return of 13% and the risk free rate of 6%.
Required:
Assume that the company is expected to experience a variable growth of 30% for the first year; 20% for the succeeding 2 years; 10% for the next 2 years; then to return to its growth rate of 8% to infinity. What is the value of the stock under this condition?
Step by step
Solved in 7 steps with 7 images
