finance calculations and summary

Finance 1

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The total returns

• Calculate stock evaluation

= (Ending share price – initial share price) + Dividend paid /Initial share price x 100%

(125 – 100) + 2 / 100 x 100

27%

Capital gain yields

= (Ending share price – initial share price)/ initial share price x 100%

(125-100)/100 x100 = 25%

=Dividend per share/ Market price per share x 100%

2/100 x 100 = 2 %

Total returns = (Current market price – previous market price + % of preferred stock)/100

• Calculate the Total Return

120 – 100 + 4/100 = 24%

Calculate the CAPM

ER= Rf + (Rm-Rf) Bj

5% + (12% -5%) 1.2 = 14.4%

ER = the expected return

Rf = the risk-free rate,

Rm = the expected return on the market portfolio,

bi = the Beta on asset

WACC

WACC = Keg (E/E+D) +Ked (1-t) (D/E+D)

Keg= cost of equity

Ked = cost of debt

t= tax rate

E= weights of equity

D= weights of debt

12 %( 80/20+80) +7(1-0.3) (20/20+80)

10.58%

Calculate the Flotation Costs

The initial cost

125 x 1.1% = 137.5$

D/E Ratio = 0.75, Asset A = $125M = D+ E = 0.75E+ E = 1.75E So E = $125M/1.75 = $ 71.43M

A= E +D

125= 71.43+D

D= 53.57

Flotation cost = Fe x E + Fd x D

0.1x 71.43 + 0.04x 53.57 = 7.14+2.14 = $ 9.28 M

Summary of the calculations

Returns in an organization come in two different forms. The income generated component and also the capital gained which can also be the capital loss. Percentage returns in an organization is the most useful to use and think of simply because it is not depended of the invested dollar. The organization therefore makes decisions according to its level either is small company or large company. In addition, the large companies make decisions on the returns depending on the total market value whereas small make decisions considering the outstanding stock in the market. The companies also make considerations of the long term bonds and short term bonds in order to measure the investments. Stock evaluation is depended on the dividends and all the earnings. Technology makes it easy for companies to access the state or condition of the market. Stock evaluation provides an insight for the organization to foresee future sales and their costs. Stock evaluation also enables the organization to be aware of the economic status of the target market. Risks and the returns are used by the company to determine the security and the worth of the stock. This makes it possible for the organizations and businesses to make present and future fruitful plans (Blass, Peled, & Yafeh, 2008).

Conclusively, when making decisions, companies use different models of stock evaluation. Historical performance of the company and its value is highly relied on during decision making. Future projections are the determinants of the undervalued stock. Flotation cost is the amount that is preferred for losses or for other issues within the company. it is important to include flotation cost while calculating the cost of the capital but many managers tend to ignore it. Flotation cost ensures that the risks which might be encountered on securities are inclusive when making decisions. A flotation cost has got an impact on the cash flow which should be a fixed percentage. WACC in an organization is determined by the external market whereby the organization should keenly put into consideration the external environment when making decisions. The management does not dictate the WACC of the organization but the external market therefore understanding the marketplace is very important. CAMP is responsible model for the determination of the risks experienced within the company and the expected return. This model enables managers to make wise decisions concerning the organization which would give the best fruits despite the challenges faced (Uppal, 2009).

References

Blass, A., Peled, O., & Yafeh, Y. (2008). The determinants of Israel’s cost of capital: globalization, reforms and politics. Bank of Israel. Research Department.

Uppal, J. Y. (2009). Cost of capital under local constraint on debt financing: Implications for investment decisions of multinational firms. Journal of Asia-Pacific Business, 1(2), 25-44.