The following information and questions pertain to the Central Dental Company The Central Dental Company has a preferred stock that pays a $5.5 dividend each year, and currently sells for $64.50. The company's marginal tax rate is 40 percent. The market price of the Central Dental Company's common stock is $46. The dividend to be paid at the end of the following year is $4.6 per share and is expected to continue to grow indefinitely at a constant rate of 6%. Central Dental Company’s has a before-tax cost of debt ki = 10%. Its tax rate is 40%. a) Based on the information about the Central Dental Company, what is the cost of preferred stock, kps, for Central Dental Company? SHOW YOUR CALCULATION b) Based on the information about the Central Dental Company’s common stock, calculate the cost of this common stock. SHOW YOUR CALCULATION c) Based on the information about the Central Dental Company’s before-tax cost of debt, ki and its tax rate, what is Central Dental Company’s after-tax cost of debt, kd? SHOW YOUR CALCULATION
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 following information and questions pertain to the Central Dental Company
The Central Dental Company has a
The market price of the Central Dental Company's common stock is $46. The dividend to be paid at the end of the following year is $4.6 per share and is expected to continue to grow indefinitely at a constant rate of 6%.
Central Dental Company’s has a before-tax cost of debt ki = 10%. Its tax rate is 40%.
a) Based on the information about the Central Dental Company, what is the cost of preferred stock, kps, for Central Dental Company? SHOW YOUR CALCULATION
b) Based on the information about the Central Dental Company’s common stock, calculate the cost of this common stock. SHOW YOUR CALCULATION
c) Based on the information about the Central Dental Company’s before-tax cost of debt, ki and its tax rate, what is Central Dental Company’s after-tax cost of debt, kd? SHOW YOUR CALCULATION
Step by step
Solved in 3 steps with 4 images
