ctm tutorial 3.docx

# Financial leverage is the degree to which a company

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Financial leverage is the degree to which a company uses fixed-income securities such as debt and preferred equity. The more debt financing company uses, the higher its financial leverage. A high degree of financial leverage means high interest payments, which negatively affect the company’s bottom-liner 4. Assume RM 1.00 shares quoted at RM 2.50, dividend just paid of 20 cents. Calculate the cost of equity. Dividend Growth Model = (D1/ P0)+g = 0.20/ 2.50 = 0.08 @ 8% P0=D1/K-G Price= 2.50 Dividend paid =D0 = 0.20 Growth rate = Nil

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5. Assume cost of equity is 8% or 0.08 cents the dividend just paid of 20 cents. Calculate the market value per share. P0 =D1/K-G Price= 0.2/0.08 = 2.50 Dividend paid =D0 = 0.20 Growth rate = Nil 6. Assume RM1.00 shares quoted at RM 2.50 cum dividend of 20 cents, calculate the cost of equity. Dividend Growth Model = (D1/ P0)+g = 0.20/ 2.50- 0.20 = 0.0869 @ 8.69% P0=D1/K-G Price= 2.50 Dividend paid =D0 = 0.20 cum dividend ( newly paid dividend) Growth rate = Nil 7. Assume the current market price of a share is RM 2.50. A dividend of 20 cents has just been paid i.e. ex-d. Assuming the expected annual growth rate for the dividend is 5% to infinity i.e. perpetuity, calculate the cost of equity. Dividend Growth Model = (D1/ P0)+g = (0.21/ 2.50) +0.05 = 0.134 @ 13.4% P0=D1/K-G Price= 2.50 Dividend paid =D0 = 0.20 D1 = D0 (1+G) = 0.2 (1+0.05) = 0.21 Growth rate = 0.05
8. Assume the current market price of a share is RM 2.00. A dividend of 20 cents per share has just been paid. Assuming that the dividend is expected to decline by 2% per annum in perpetuity. Calculate the cost of equity Dividend Growth Model = (D1/ P0)+g = (0.196/ 2.00) - 0.02 = 0.078 @ 7.8% P0=D1/K-G Price= 2.00 Dividend paid =D0 = 0.20 D1 = D0 (1+G) = 0.2 (1-0.02) = 0.196 Growth rate = -0.02 9. Using CAPM model, calculate the cost of equity assuming an equity beta of 1.4, an expected market return of 16% and a risk free rate of 10% Cost of equity = Ke 1. CAPM model CAPM = rfr + beta(Rm-rfr) = 0.1+1.4(0.16-0.1) = 18.4% Beta (Rm-rfr)= risk premium (Rm-rfr) = market risk premium
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