RAK Ceramic is currently paying dividend Tk. 3.70 per share, which is expected to grow at a constant rate per year. Investors required rate of return is 18 percent. Calculate the price of the stock based on average growth of the stock, and justify your findings to take stock investment decisions. (CMP=77.50 Tk.) YearDividend per shareGrowth rate20143.25 Tk. 20153.65 Tk. 20163.95 Tk. 20174.25 Tk. 20185.30 Tk. 20194.40 Tk. 2.Explain different types of common stocks with basic features in light of BD stock market and major challenges of DSE to build up investors’ confidence.3. Briefly explain the steps in capital budgeting decision making process with constraints of implementation stage.

The question can be solved using constant dividend growth model

Answered: RAK Ceramic is currently paying…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter12: The Cost Of Capital

Section: Chapter Questions

Problem 19P

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CALCULATING THE WACC Here is the condensed 2019 balance sheet for Skye Computer Company (in thousands of dollars): Skyes earnings per share last year were 3.20. The common stock sells for 55.00. last years dividend (D0) was 2.10, and a flotation cost of 10% would be required to sell new common stock. Security analysts are projecting that the common dividend will grow at an annual rate of 9%. Skyes preferred stock pays a dividend of 3.30 per share, and its preferred stock sells for 30.00 per share. The firms before-lax cost of debt is 10%, and its marginal tax rate is 25%. The firms currently outstanding 10% annual coupon rate, long-term debt sells at par value. The market risk premium is 5%, the risk-free rate is 6%, and Skyes beta is 1.516. The firms total debt, which is the sum of the companys short-term debt and long-term debt, equals 1.2 million. a. Calculate the cost of each capital component, that is, the after-tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings, and the cost of newly issued common stock. Use the DCF method to find the cost of common equity. b. Now calculate the cost of common equity from retained earnings, using the CAPM method. c. What is the cost of new common stock based on the CAPM? (Hint: Find the difference between r1 and rs as determined by the DCF method, and add that differential to the CAPM value for rs.) d. If Skye continues to use the same market-value capital structure, what is the firms WACC assuming that (1) it uses only retained earnings for equity and (2) if it expands so rapidly that it must issue new common stock?

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Year	Dividend per share	Growth rate
2014	3.25 Tk.
2015	3.65 Tk.
2016	3.95 Tk.
2017	4.25 Tk.
2018	5.30 Tk.
2019	4.40 Tk.