[Question 2] The firm ABC currently pays no dividends to shareholders. Its stock is, however, expected to pay the dividend of ¥ 80 per share a year from today. Thereafter, the dividend is expected to grow at an annual rate of 10% for the next four years and from the fifth year from today, it grows at a constant rate of 3% per year thereafter. Assuming the appropriate discount rate is 12%, answer the following sub - questions. (2a) Calculate the present value of dividends paid from the next year to the fifth year from today. (2b) Calculate the present value of dividends paid from the sixth year from today and thereafter. Then estimate the intrinsic value of the ABC stock today. If the market price of the stock is equal to the intrinsic value, what is the expected dividend yield today? (2c) What do you expect the stock price to be in one year from now? Confirm the expected rate of return, which is the sum of dividends yield and capital gains yield, is equal to the discount rate.
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.
![[Question 2] The firm ABC currently pays no dividends
to shareholders. Its stock is, however, expected to pay
the dividend of ¥ 80 per share a year from today.
Thereafter, the dividend is expected to grow at an
annual rate of 10% for the next four years and from the
fifth year from today, it grows at a constant rate of 3%
per year thereafter. Assuming the appropriate discount
rate is 12%, answer the following sub- questions. (2a)
Calculate the present value of dividends paid from the
next year to the fifth year from today. (2b) Calculate the
present value of dividends paid from the sixth year from
today and thereafter. Then estimate the intrinsic value
of the ABC stock today. If the market price of the stock is
equal to the intrinsic value, what is the expected
dividend yield today? (2c) What do you expect the stock
price to be in one year from now? Confirm the expected
rate of return, which is the sum of dividends yield and
capital gains yield, is equal to the discount rate.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F2c93532d-a9d7-4ff4-9ece-a62b638aef17%2Ff8aa8851-b13d-4194-886c-c4e304272a4e%2Fxnkema_processed.jpeg&w=3840&q=75)
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