You are trying to value the stocks of Imaginary Inc. The company is currently involved in a very risky, but potentially very profitable project. In the preceding year, the company had earnings of $10 per share. You expect the earnings per share to grow to $15, $20, and $25 in the next three years, after which you expect a growth rate of 2%. The company always applies a plowback ratio of 60%. You estimate that a risk-adjusted discount rate of 10% is appropriate. a). What are the expected dividends per share in the next three years? b). What is the expected price per share three years from now? c). What is the fair stock price per share today?
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 trying to value the stocks of Imaginary Inc. The company is currently involved in
a very risky, but potentially very profitable project. In the preceding year, the company
had earnings of $10 per share. You expect the earnings per share to grow to $15, $20, and
$25 in the next three years, after which you expect a growth rate of 2%. The company
always applies a plowback ratio of 60%. You estimate that a risk-adjusted discount rate
of 10% is appropriate.
a). What are the expected dividends per share in the next three years?
b). What is the expected price per share three years from now?
c). What is the fair stock price per share today?
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