Consider thefollowing information related to two companies of the same industrya
ID: 2662264 • Letter: C
Question
Consider thefollowing information related to two companies of the same industryas on Dec. 31, 2009.
XYZ Company
ABC Company
Share Capital(Rs.10 each)
Rs. 850,000
Rs.1,400,000
Reserves
Rs. 320,000
Rs. 500,000
RetainedEarnings
Rs. 200,000
Rs. 250,000
CurrentYear Dividend
20 % (Rs.2.0)
16 % (Rs.1.60)
Dividend GrowthRate
10%
5%
Market Price of Common Stock
Rs. 15
Rs. 12
Required:
Which company’s capitalstructure is more efficient?
Note: (Calculations are notrequired. Do your calculations in rough work and support youranswer in just one line.)
[Hint: Compare Cost of Equities ofboth companies.]
XYZ Company
ABC Company
Share Capital(Rs.10 each)
Rs. 850,000
Rs.1,400,000
Reserves
Rs. 320,000
Rs. 500,000
RetainedEarnings
Rs. 200,000
Rs. 250,000
CurrentYear Dividend
20 % (Rs.2.0)
16 % (Rs.1.60)
Dividend GrowthRate
10%
5%
Market Price of Common Stock
Rs. 15
Rs. 12
Explanation / Answer
Cost Of Equity under dividend capitalization model =================================== Dividendper share COE = --------------------- +Growth rate PricePer Share Company Company XYZ ABC -------------- ------------ =(2.0 x 1.1 /15) +10% 24.66% =(1.60x 1.05/12) +5% 19%Related Questions
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