Concept explainers
Case summary:
Person C and Person GR are the founders and owners of the R Company. This company manufactures and installs heating, ventilation, and cooling units (HVAC) commercially. Both the owners have 50,000 shares of company’s stock as per the partnership deed. They wanted to sell their stocks and decided to value their holding in the company.
R Company has earnings per share of $3.15 and the dividends of $45,000 each were paid to the owners of the company. Moreover, there is even
Characters in the case:
R Company: The firm that wants to value their stocks
Person C: Co-owner of Company R
Person GR: Co-owner of Company R
To discuss: On the expression for the price-earnings ratio that imply about the relationship between the required return, return on equity of the company, and dividend payout ratio.
Introduction:
A company’s market price per share to its earnings per share is termed as price earnings ratio. This ratio assists in stock selection. The rate of return refers to the loss or gain incurred on the investment made by the company.
Return on equity (ROE) measures the profitability of the company by indicating profit generated from the money invested by the shareholders.
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FUND. OF CORPORATE FIN 2 YEARS CONNECT
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- 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 a)What is the difference between the required return on equity and actual return on equity? Can they be equal? Which one would be used to compute the stock price?arrow_forwardWyden Brothers uses the CAPM to calculate the cost of equity capital. The company’s capital structure consists of common stock, preferred stock, and debt. Which of the following events will reduce the company’s WACC? a) A reduction in the market risk premium. b) An increase in the risk-free interest rate. c) An increase in the beta of the company’s stock. d) An increase in expected inflation. e) An increase in the flotation costs associated with issuing preferred stock.arrow_forward
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