Chisipite plc has been listed on a stock exchange for 30 years and now has a large number of diverse shareholders none of whom exceeds a 5% stake. It has sought to raise the annual dividend per share by at least 1% per annum and has never cut its dividend even during years of low profits. The company now has a new chief executive officer who wishes to quickly develop the company through a major project. Summarised financial statements for the last financial year for Chisipite plc Income statement £'000 Revenue 1,000,000 Cost of sales ( 550,000) Gross profit 450,000 Overhead expenses ( 220,000) Operating profit 230,000 Interest payable ( 50,000) Profits before tax 180,000 Corporation tax ( 36,000) Earnings 144,000 Dividends ( 90,000) Retained earnings 54,000 Statement of financial position Share capital 25,000 Share premium 250,000 Retained earnings 300,000 Total equity 575,000 Non-current liabilities 10 year loan notes 5% 1,000,000 Capital employed 1,575,000 Other information Current share price £ 60.00 Interest rate on loan notes 5.0% Beta factor for Chisipite plc 1.14 Equity risk premium 3.4% Yield on government bonds 2.3% Gross profit margin 45.0% Tax rate 20.0% NEED TO CALCULATE 1 Calculate Chisipite’s cost of equity capital using the capital asset pricing model. Calculate the weighted average cost of capital and use this to calculate the net present value of the project. 2 Calculate Chisipite plc’s capital gearing ratio, interest cover ratio and dividend cover ratio for the last financial year.
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
Chisipite plc has been listed on a stock exchange for 30 years and now has a large
number of diverse shareholders none of whom exceeds a 5% stake. It has sought to
raise the annual dividend per share by at least 1% per annum and has never cut its
dividend even during years of low profits.
The company now has a new chief executive officer who wishes to quickly develop
the company through a major project.
Summarised financial statements for the last financial year for Chisipite plc
Income statement £'000
Revenue 1,000,000
Cost of sales ( 550,000)
Gross profit 450,000
Overhead expenses ( 220,000)
Operating profit 230,000
Interest payable ( 50,000)
Profits before tax 180,000
Corporation tax ( 36,000)
Earnings 144,000
Dividends ( 90,000)
Share capital 25,000
Share premium 250,000
Retained earnings 300,000
Total equity 575,000
Non-current liabilities
10 year loan notes 5% 1,000,000
Capital employed 1,575,000
Other information
Current share price £ 60.00
Interest rate on loan notes 5.0%
Beta factor for Chisipite plc 1.14
Equity risk premium 3.4%
Yield on government bonds 2.3%
Gross profit margin 45.0%
Tax rate 20.0%
NEED TO CALCULATE
1 Calculate Chisipite’s
model
calculate the
2 Calculate Chisipite plc’s capital gearing ratio, interest cover ratio and
dividend cover ratio for the last financial year.
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