Lecture 3 Corporate Finance Stock Valuation Cost of Capital PDF

· 5~ :-$1:'0Ck 'i fliU.~tion - -~ ·.-_ -. ---..- -~-> -.,. ·. , ~ -. · ·:. What;- ista/·stock a.nd _af w hat p -r iceshould the firm sell this share? I \. ' ,.. ·;:,.......

· 5~ :-$1:'0Ck 'i fliU.~tion - -~ ·.-_ -. ---..- -~-> -.,. ·. , ~ -. · ·:. What;- ista/·stock a.nd _af w hat p -r iceshould the firm sell this share? I \. ' ,.. ·;:,.... CSSHARE ,;- ·1 · - (owner) 1-...----~~---- , ~jvidend "._ - - - - - - - - - -. I -~ · So!1) aia Salem. Col1.Sfant:growtft>friOdel (Gbrdon·model) ·· The-Gordon model is a common name.for the constant-growth model that is wide1y · c~t~d 'in divi~end valuation. The underlying assijmpt!oll qf thi~ model is that t~e ·- divtdends. will grow at a constant rate. The following equation represents this. model. - -., ;. I Where ' ~~ - 0 1 1) 1 -=-nextyeard~viqends ~ D0 x (1 + g) j · ·-D0 =cttrrent dividend , · · · · r i1 = -required rate of, return.g·:::;:CO~Stfl,~t growtr r~te ·. I. !' ' t /.· somaia ,._., ' salem  ·' ;E xam ple : ·~· ' 1 ~;~ ABC Co¥l pany paid last divid end. is 1.00 given ·that the histo rical ~.. ; ,.. ,...., __.. -.... t. '.· - ~- , ' ~. ~,.., (.annua~ grow th rate of ABC Com pa~y dividend~ equa ls ·10% and the ' I. '. I I I reqrt il'ed rat6"o f retur n is 16% A: ,calcu late the \ralue of this share. I somaia salem  -~ -__:-~/~i :.~~,.,.,. -_/ ··. /., Po=. ,, Where. -r d==:l.6%, · g==:l..0 %, D 0 ==:l..6 tberefp ,r e: D.1 =1.6X t1+.10%).. ; ' Po -· ---,i 1.60(1+10) " ' 16%-10% - 1.696 · 6o/o.. 28.27·EGP , , t If j~ f', somaia salem  :.-.Capital, ·s sef---- pricing·,m odel /~ \ ·Choice of , To detednine '' ".- ·investment price of stock · D1.. which has -=p~. rJ-g actual ~~ t tretu rn ·~ ,r j ~ 1 so""aia salem · ·,I. :~/~\U.-~qi t ~.../ - - -_::..( ·.. P·_·g capital , ,.. ~ structure. · This.is known as the.· weig'h ted average cost of capital (} (W1(CC).·. ~. ~ ,. - f~ so rr: a,i a salem  J-t :,. _., Val ue ·-o f ·com pa.. nya :de'b ,t +eq u.it: y(C.· ·.·-:~1eia -,~ -· -_;,>)(?;_·:· c· ·.. S +PS ) _. ;:,,.. -- · ·. cost , IJecidM'~ by- cilf)ital b!)dget techn iques > >.. ~; · Decided by Weigh ted avera ge cost of capita l. :. ~...,.-. l ~Deb t: bond s. 2-&} uity: -'\ Asset ' 'f.. _-;' prefe rred stock ,. (inv ~e~ t). -Incr ease.valuej of firm 3-f4 uity-: comm on st~k. Th e com pan y Ne eds 100 0,0 00 capital... ~. to ge t it wil l iss ue bo nd s an d sha res and this wil l cos t it ~. I -,-:·;::{_~:!/- -~,~~ --.( r ~:·:to· ··.,..,.. -.If...__ -.... -·c ost ~~ by Wei ghte d aver age cost of capi ·.\ ·- tal I-D ebt : -~bon ds \ soma ia salem..-·_._. ; ·-~-/if}:Jii :...,~~--'. -......~~ ·.. :- ·_~;·r.-:-~-~