Question 31: An analyst has assembled the following information regarding Net-Zone Incorporated and the market in general: Net-Zone dividend (paid yesterday) $2.15 per share Net-Zone expected dividend growth Net-Zone expected ROE 3% per year 16.2% Net-Zone beta 1.8 Net Zone long-term bond yield Expected return on S&P 500 Index 30-day Treasury bill yield 10-year Treasury bond yield 8.6% 10.7% 3.5% 4.8% When reviewing the data provided by the analyst, the CFO of Net-Zone was surprised by the value of the company's beta. The CFO understands that the beta value is an indicator of risk, and investors need to be compensated for their risk of investing. The company's current stock price is just under $17 per share, which the CFO believes is too low considering the company's increased profit margins. If the CFO
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.
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