Concept explainers
e)
1)
Case summary:
During the few previous years, Company J has been controlled with the aid of high price of capital to make investments. Recently, it is observed that, capital costs have been deteriorating and firm has decided to notice severely at a primary expansion program suggested by marketing and advertising department. For this purpose, the major task for the company is to estimate its cost of capital.
To determine: Estimated
2)
To discuss: The way Person X use the information to anticipate future growth rate in dividends and determine the growth rate he gets and whether he is consistent with earlier growth rate of 5.8%.
3)
To discuss: Whether dividend growth model is applied if growth rate was not constant.
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Intermediate Financial Management
- Using the Dividend Growth Approach, suppose that your company is expected to pay a dividend of $1.25 per share next year. There has been a steady growth in dividends of 5.1% per year and the market expects that to continue. The current price is $29. What is the cost of equity?arrow_forwardKimbi Limited had the following items on its balance sheet at the beginning of the year: Assets Cash Property Plant & Equipment Liabilities and equity $50,000 Debt $ 350,000 Equity $ 100, 000 $ 300,000 The net profit this year is $20, 000 with a dividend of $5, 750.arrow_forwardSuppose the firm has historically earned 15%on equity (ROE) and has paid out 62% of earnings, and suppose investors expect similarvalues to obtain in the future. How could youuse this information to estimate the futuredividend growth rate, and what growth ratewould you get? Is this consistent with the5.8% growth rate given earlier?arrow_forward
- Assuming yourself to be Anna, narrate what you would have read in the file. Your narrative should include answers to the following: Note: 1 Retention ratio = 1 – Dividend payout ratio e) Does the fact that Chatterbox will allow only a 70% payout from the next period, allows it to grow? If so, what will be the growth rate if the firm successfully meets the investor expectation about the return on equity.arrow_forwardFor Company ABC, if stock price P0 = $30; dividend paid at the end of period 1 D1 = $3.00; growth rate g = 5%; What’s the required rate of return for equity holder rs = ? If the flotation cost F = 10%; What’s the required rate of return for equity holder rs = ?arrow_forwardYou observe a stock price of $18.75. You expect a dividend growth rate of 5%, and the most recent dividend was $1.50. What is the required return? Solve using Excelarrow_forward
- Reizenstein Technologies (RT) has just developèd a solar panel capable of generating 200% more electricity than any solar panel currently ón the market. As. result, RT is expected to experience a 15% annual growth rate for the next 5 vear By the end of 5 years, other firms will have developed comparable technology, and RT's growth rate will slow to 5% per year indefinitely. Stockholders require a return of 12% on RT's stock. The most recent annual dividend (Do), which was paid yesterday, was $1.75 per share. a. Calculate RT's expected dividends for t 1, t 2, t 3, t = 4, and t 5. b. Calculate the estimated intrinsic value of the stock today, Po. Proceed by finding the present value of the dividends expected at t 1, t 2, t 3, t = 4, and t = 5 plus the present value of the stock price that should exist at t = 5, P,. The Ps stock price can %3Darrow_forwardWouldn't this be a multi-growth Dividend approach? Why was the dividend for Year 2, and 3 calculated using the -3% as it said it will be the rate for the next 2 years. Also, why wasn't the WACC used in the calculation? Is this just irrelevant info added to throw off the reader? Also, shouldn't we be added up the values of the first stage dividend growth and the perpetual dividend growth?arrow_forwardThe Wellington Co. likes to use the dividend discount model to estimate its cost of equity. What should that be (in percent to two places) if their stock today is $54 and with a constant dividend growth of 3% their next dividend is estimated to be $0.91? Urgent please helparrow_forward
- What is the required rate of return on a share whose value is Kshs 62.50, its upcoming dividend is Kshs 5 and the growth rate is 4%?arrow_forwardBlue is currently selling for $26 per share. Its next dividend (in one year) is forecasted to be $1. Immediately after the dividend is paid, you expect the price to be $33. a. What is its expected dividend yield? b. What is its expected capital gain rate? c. What is the equity investors' expected return? Question content area bottom Part 1 a. Dividend yield: enter your response here%. (Round to two decimal places.) b. Capital gain rate: enter your response here%. (Round to two decimal places.) c. Expected Return: enter your response here%. (Round to two decimal places.)arrow_forwardI need detailed explanation for the following question If a firm bases its growth projection on the rate of sustainable growth, shows positive net income, and has a dividend payout ratio of 30 percent, then the: A. fixed assets will have to increase at the same rate, even if the firm is currently operating at only 78 percent of capacity.B. number of common shares outstanding will increase at the same rate of growth.C. debt-equity ratio will have to increase.D. debt-equity ratio will remain constant while retained earnings increase.E. fixed assets, the debt-equity ratio, and number of common shares outstanding will all increasearrow_forward
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning