Rate of Return for Stocks and Bonds Q1: Stock Valuation Given Initial Price = $100 Dividend = $2 Ending Price = $125 Dividend Yield = [Dividend Paid/Initial Price] * 100 = ($2/$100)*100 = 2% Thus dividend yield on the stock is 2% Capital Gain Yield = [Ending Price – Initial Price]/Initial Price = ($125 - $100)/$100 = 25% The capital gain yield on the stock is 25% Total Percentage Return = Capital Gain Yield + Dividend Yield = 25% + 2% = 27% The total percentage return on the stock is 27% Q2: Total Return Dividends = 4% of $100 i.e. $4 Initial Price = $100 Market Stock Price = $120 Total Return = (Market Price – Initial Price) + Dividends = ($120 - $100) + $4 = $24 Total Return Percentage = Total Return/Initial Price * 100 = $24/$100 * 100 = 24% The total return on the no obligation regarding payment of dividends. However repayment of loan interest is the obligation of the organization and it must be paid at the due date. Thus it quite integral for the management to select proper financial decision of determining a most suitable alternative to financing the required capital needs of the organization as it carries certain costs. The company can take the financial decision of acquiring by borrowing capital if it has a high return on capital employed but if it has a limited return the company must undertake financial decision of share issuing for capital acquisition (Petty et al. 2015). References Tapiero C. S. (2003). Risk finance and asset pricing: Value measurements and markets. New Jersey US: John Wiley & Sons. Petty J. W. Titman S. Keown A. J. Martin P. Martin J. D. & Burrow M. (2015). Financial management: Principles and applications. Australia: Pearson Higher Education. [...]
Purpose of Assignment The purpose of this assignment is to allow the student an opportunity to calculate the rate of return of equity and debt instruments. It allows the student to understand the effects of dividends; capital gains; inflation rates; and how the nominal rate of return affects valuation and pricing. The assignment also allows the student to apply concepts related to CAPM, WACC, and Flotation Costs to understand the influence of debt and equity on the company's capital structure. Assignment Steps Resources: Corporate Finance Calculate the following problems and provide an overall summary of how companies make financial decisions in no more than 700 words, based on your answers: Stock Valuation: A stock has an initial price of $100 per share, paid a dividend of $2.00 per share during the year, and had an ending share price of $125. Compute the percentage total return, capital gains yield, and dividend yield. Total Return: You bought a share of 4% preferred stock for $100 last year. The market price for your stock is now $120. What was your total return for last year? CAPM: A stock has a beta of 1.20, the expected market rate of return is 12%, and a risk-free rate of 5 percent. What is the expected rate of return of the stock? WACC: The Corporation has a targeted capital structure of 80% common stock and 20% debt. The cost of equity is 12% and the cost of debt is 7%. The tax rate is 30%. What is the company's weighted average cost of capital (WACC)? Flotation Costs: Medina Corp. has a debt-equity ratio of .75. The company is considering a new plant that will cost $125 million to build. When the company issues new equity, it incurs a flotation cost of 10%. The flotation cost on new debt is 4%. What is the initial cost of the plant if the company raises all equity externally? Submit your summary and all calcluations.