Problem 8-09 You are valuing a bank. The bank currently has assets of $340 per share. Five years from now (that is, at the end of five years), you expect their assets per share to be $490. After Year 5, you expect their assets per share to grow at 3.25 percent per year forever. The bank has an ROA of 1.8 percent and an ROE of 11.0 percent. The bank's cost of equity is 10.0 percent. What is the value of the bank's stock? Use the free cash flow to equity model to value this stock. Do not round intermediate calculations. Round your answer to the nearest cent. $
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
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