Calculate the Firms Cost of Equity
Essay by Aprylle-Dawn Lewis-Haye • March 30, 2016 • Case Study • 764 Words (4 Pages) • 1,034 Views
- Calculate the firms Cost of Equity?
The cost of equity is the return that stockholders require for their investment in a company. The traditional formula for cost of equity (COE) is the dividend capitalization model:
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A firm's cost of equity represents the compensation that the market demands in exchange for owning the asset and bearing the risk of ownership.The cost of equity is basically what it costs the company to maintain a share price that is theoretically satisfactory to investors.
Cost of Equity= 8.25 +10
10
Cost of Equity =10.825
- Calculate the Long-term debt-to equity ratio for the two most recent years.
Debt-Equity Ratio1 | = | Long-term Debt | = | 9,711,604 | = 0.01976 | |
Equity | 491,418,461 |
2015
Debt-Equity Ratio1 | = | Long-term Debt | = | 0 | = 0.0 | |
Equity | 429,936310 |
2014
Noncurrent liabilities + current portion liabilities = long-term debt (figure from appendices)
$7,735,600+ $1,976,004 = $9,711,604
There was no info for year 2014; however debt-to-equity ratio of 0.01971 calculated using long term debt/ equity meansthat the company utilizes long-term debts equal to 1.976% of equity as a source of long-term finance.
Even though formula was used to calculate the debit equity ratio, I would rather used what was given in the financial highlight of Blue Powers Statements;
Debit: Equity Ratio
- 2015- 1.88%
- 2014- 0.00%
- 2013- 0.16%
There was no info for year 2014; however debt-to-equity ratio for 2015 was 0.0188 calculated using long term debt/ equity, means that the company utilizes long-term debts equal to 1.88% of equity as a source of long-term finance. As for year 2013, the debt-to-equity ratio was 0.0016 also calculated using the long term/ equity, means that the company utilises long term debt to 0.16% of equity as a source of long-term finances.
- What is the most recent stock price
The most recent stock price according to the Jamaica Junior Stock exchange for Blue Power Group Limited on March 9, 2016 was $10.00. (Appendices 1)
- What is the market value of equity, or market capitalization?
Market capitalization = number of shares outstanding * share value
TOTAL SHARES OUTSTANDING: 56,499,000
=56,499,000* 1.24
=$69,957,001
- How many shares of stock does the company have outstanding? What is the most recent annual dividend?
The company has 56,499,000 shares of stock outstanding. The most recent annual dividend is $8,474,850.
- Can you use the dividend discount model in this case?
Yes you can use the dividend discount model as this is a procedure for valuing the price of a stock by using predicted dividends and discounting them back to present value. This is to see if the value obtained from the dividend discount model is higher than what the shares are currently trading at, then in which the stock is undervalued.
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