The current risk-free rate is 2.5%. The market risk premium is 5%. If CC\'s mark
ID: 2738536 • Letter: T
Question
The current risk-free rate is 2.5%. The market risk premium is 5%. If CC's market beta is 1.5,
What is the present value of CC's dividends from year+1 through year+5 excluding the continuing value. Ignore any mid-year discounting.
Actual Projected 2015 Year +1 Year +2 Year +3 Year +4 Year +5 Comprehensive Income $13,696 $27,990 $30,048 $32,252 $34,612 $37,138 Common Shareholders’ Equity: Paid-In Capital $8,626 $9,488 $10,438 $11,482 $12,630 $13,892 Retained Earnings 127,320 137,384 154,036 161,914 187,910 194,048 Accumulated Other Comprehensive Income (5,376) (5,376) (5,376) (5,376) (5,376) (5,376) Total Common Equity $130,570 $141,496 $159,098 $168,020 $195,164 $202,564Explanation / Answer
Calculation of Required rate of return by using CAPM formula : Rf + Beta (Market Premium) = 2.5 + 1.50 (5%) = 2.5% + 7.5% = 10% So, required rate of return is 10% Interest expenses per annuam 6% Tax rate is 30% 2015 Year +1 Year +2 Year +3 Year +4 Year +5 Total Common Equity $130,570 $141,496 $159,098 $168,020 $195,164 $202,564 Interest bearing Debt capital $130,000 $130,000 $130,000 $130,000 $130,000 $130,000 Comprehensive Income $ 13,696.00 $ 27,990.00 $ 30,048.00 $ 32,252.00 $ 34,612.00 $ 37,138.00 Less: Interest expenses @ 6% p.a 7,800 7,800 7,800 7,800 7,800 7,800 Income after interest expenses 5,896.00 20,190.00 22,248.00 24,452.00 26,812.00 29,338.00 Less: Tax @ 30% 1,768.80 6,057.00 6,674.40 7,335.60 8,043.60 8,801.40 After tax income = (a) 4,127.20 14,133.00 15,573.60 17,116.40 18,768.40 20,536.60 calculation of Earning per share : Total no. Of shares (b) 5000 5000 5000 5000 5000 5000 E.P.S = (a) / (b) 0.83 2.83 3.11 3.42 3.75 4.11 Retained earnings 10,064 16,652 7,878 25,996 6,138
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