Calculate the value of
the stock:
<span>The dividend on
preferred stock is received constantly for perpetuity. So, the value of
preferred stock can be calculated by dividing the dividend with the required
rate of return. If the dividend rate is 8% on par value of $ 100 and required
rate is 6% the value of preferred stock will be P = (100x0.08)/0.06 = 8/0/06 =
133.3333333</span>
Answer:
Expected return on equity is 11.33%
Explanation:
Using Weighted Average Cost Capital without tax formula, overall rate of return is given by the formula:
WACC=(Ke*E/V)+(Kd*D/V)
Kd is the cost of debt at 6%
Ke is the cost of equity at 12%
D/E=1/2 which means debt is 1 and equity is 2
D/V=debt/debt+equity=1/1+2=1/3
E/V=equity/debt+equity=2/1+2=2/3
WACC=(12%*2/3)+(6%*1/3)
WACC=10%
If the firm reduces debt-equity ratio to 1/3,1 is for debt 3 is for equity
D/V=debt/debt+equity=1/1+3=1/4
E/V=equity/debt+equity=3/1+3=3/4
WACC=10%
10%=(Ke*3/4)+(6%*1/4)
10%=(Ke*3/4)+1.5%
10%-1.5%=Ke*3/4
8.5%=Ke*3/4
8.5%=3Ke/4
8.5%*4=3 Ke
34%=3 Ke
Ke=34%/3
Ke=11.33%
Answer:
If you need negotiating
Explanation:
If you need to negotiate, often times a silent partner can be better because they will not get you into more trouble or ruin your presentation with their own activeness.
