The CFO of ABC plc is analysing the capital structure of the organisation. He claims that ABC is not financing itself in a way which reduces its cost of capital (WACC). The information below represents the ABC’s financing as at 31 December 2016: £000 Ordinary shares, £1 each 20000 Reserves 5000 7% preference shares, £1 each 10000 10% bonds (irredeemable 31 December 2016) 15000 Total capital 50000 Other information from stock market (as at 31December 2016): Ordinary share price (ex-div) £2.65 Preference share price (ex-div) 75p Bond price for 10% bonds £107 per £100 Last 5 years’ dividends (most recent last) 21p, 23p, 25p 27p, 28pv The CFO states that by issuing more debt ABC will lower its cost of capital. He suggests issuing £15m of 11 per cent bonds. These bonds will be sold at a 5%premium to their par value and will mature after 7 years. The money will be used to repurchase ordinary shares which ABC will further cancel. The CFO presumes that repurchasing will result in the organisation’s share price rise to £2.85 and the futuredividend growth rate to grow by 20%(relatively). He anticipates the price of the 10%bonds to be unaffected, but the price of the preference shares to drop to 68p. Corporate tax stands at 30% Calculate the book value
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.
The CFO of ABC plc is analysing the capital structure of the organisation. He claims that ABC is not financing itself in a way which reduces its cost of capital (WACC). The information below represents the ABC’s financing as at 31 December 2016:
|
£000 |
|
|
Ordinary shares, £1 each |
20000 |
|
Reserves |
5000 |
|
7% preference shares, £1 each |
10000 |
|
10% bonds (irredeemable 31 December 2016) |
15000 |
|
Total capital |
50000 |
Other information from stock market (as at 31December 2016): Ordinary share price (ex-div) £2.65
Last 5 years’ dividends (most recent last) 21p, 23p, 25p 27p, 28pv
The CFO states that by issuing more debt ABC will lower its cost of capital. He suggests issuing £15m of 11 per cent bonds. These bonds will be sold at a 5%premium to their par value and will mature after 7 years. The money will be used to repurchase ordinary shares which ABC will further cancel. The CFO presumes that repurchasing will result in the organisation’s share price rise to £2.85 and the futuredividend growth rate to grow by 20%(relatively). He anticipates the price of the 10%bonds to be unaffected, but the price of the preference shares to drop to 68p. Corporate tax stands at 30%
Calculate the book value
Step by step
Solved in 2 steps with 2 images
