In: Finance
Capital Gains = 125-100 = 25 and Dividend Yield = $2
Total return percent = (25+2)/100 = 27/100 = 27%
Capital Gain return = 25/100 = 25%
Dividend Yield = 2/100 = 2%
Dividend = 4% of 100 = $4. The capital gain = 120-100 = 20
Total return for last year = $24 = 24%
CAPM - Expected return of Stock = Rf + beta*(Rm - Rf) = 5 +1.2*(12-5) = 13.4%
We*Re + Wd*Rd*(1-T) = 0.8*12 + 0.2*7*(1-0.3) = 10.58%
125 million will be raised by issuing both debt and equity so that D/E remains 0.75.
D = 0.75E
E + 0.75E = 125
E = 71.43, D =125- 71.43 = 53.57
Initial cost of the plant will be = 125 + 71.43*0.10 + 53.57*0.04 = 125 + 9.2858 = 134.2858
Capital Gains = 125-100 = 25 and Dividend Yield = $2
Total return percent = (25+2)/100 = 27/100 = 27%
Capital Gain return = 25/100 = 25%
Dividend Yield = 2/100 = 2%
Dividend = 4% of 100 = $4. The capital gain = 120-100 = 20
Total return for last year = $24 = 24%
CAPM - Expected return of Stock = Rf + beta*(Rm - Rf) = 5 +1.2*(12-5) = 13.4%
We*Re + Wd*Rd*(1-T) = 0.8*12 + 0.2*7*(1-0.3) = 10.58%
125 million will be raised by issuing both debt and equity so that D/E remains 0.75.
D = 0.75E
E + 0.75E = 125
E = 71.43, D =125- 71.43 = 53.57
Initial cost of the plant will be = 125 + 71.43*0.10 + 53.57*0.04 = 125 + 9.2858 = 134.2858
Based on the above answers explain how companies make financial decisions
Stock valuation : of the total return of 27%, 25% is due to capital gain & 2% is because of dividend earned.
Total Return : the total return earned is cumulative of dividend earned of $4 and capital gain of $20. thus if the current market price is more than previous price the return will be positive. If dividend is earned then the negative return will be reduced by the dividend amount. Thus an investor will invest in a company only if the total return is positive and the return matches or exceeds his target return.
CAPM : The Capital Asset Pricing Model (CAPM) describes the relationship between systematic risk and expected return for assets, particularly stocks. Investors expect to be compensated for risk and the time value of money. The risk-free rate in the CAPM formula accounts for the time value of money. The other components of the CAPM formula account for the investor taking on additional risk. Beta is a measure of how stock will move with the market. The goal of the CAPM formula is to evaluate whether a stock is fairly valued when its risk and the time value of money are compared to its expected return.
WACC : The weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is proportionately weighted. All sources of capital, including common stock, preferred stock, bonds, and any other long-term debt, are included in a WACC calculation. By taking a weighted average in this way, we can determine how much interest a company owes for each dollar it finances.
Initial Cost : Initial cost of plant takes into account not only the cost of plant but also cost of raising equity and cost of debt. Cost of equity and cost of debt will increase the cost of the plant. If a fixed asset is funded by equity or debt the same needs to be considered while determining the cost of asset.