CALCULATION:

FORMULA
FIN 420
CHAPTER 9: LONG TERM FINANCING
 CALCULATION: Valuing Preferred Stock
Vps= annual dividend = D
required rate of return kps

Example: Xerox’s Series C preferred stock pays an annual dividend of

$6.25 and the investors required rate of return is 5%.

Vps = D = $6.25 = $125.00

kps 0.05

Keown, Martin, Petty - Chapter 8 2

CALCULATION: Preferred Stock
Cost of Preferred Stock (Kps) - %

• Kps = D0/MP- FC
• Kps = Cost of Preferred Stock
• D0 = Dividend (every year/period)
• MP = Market Price of Pref. Stock
• FC = Floatation Cost

Keown, Martin, Petty - Chapter 8 3

Example: Calculating Cost of Preferred Stock (Kps)

Kps = D0/MP- FC

Consider the valuation of a preferred stock that paid $1.00 dividend at the end of the last
year. The market price of the stock is $10 and the floatation cost is 5 % of the market
price. Investors required rate of return is 17%. Calculate the real cost of the stock

Thus: = $1.00/($10-$0.50)
• Kps = D0/MP- FC =____% (Try to calculate on ur own)

Keown, Martin, Petty - Chapter 8 4

CALCULATION: Valuing Common Stock
Dividend Valuation Model
• Value of Common stock
= PV of future dividends

• Vcs = D1/kcs- g
• Vcs = Common stock value
• D1 = dividend in year 1
• Kcs = required rate of return
• g = growth rate
Keown, Martin, Petty - Chapter 8 5
Example: Dividend valuation model

Vcs = D1/kcs- g

Consider the valuation of a common stock that paid $1.00 dividend at the end of
the last year and is expected to pay a cash dividend in the future. Dividends are
expected to grow at 10% and the investors required rate of return is 17%.
The dividend last year was $1. Thus:
Compute the new dividend by: Vcs = D1/ (kcs – g)
D1 = D0(1+g) = $1.10/(0.17-0.10)
= $1(1+.10) = $15.71
=$1.10
Keown, Martin, Petty - Chapter 8 6
CALCULATION: Common Stock
Cost of Common Stock (Kcs) - %

• Kcs = (D1/MP- FC) + g

• Kcs = Cost of Common Stock
• D1 = Latest Dividend : D1 = D0(1+g)
• MP = Market Price of Common. Stock
• FC = Floatation Cost
• g = Growth Rate

Keown, Martin, Petty - Chapter 8 7

Example: Calculating Cost of Common Stock (Kcs)

Kcs = (D1/MP- FC) + g

Consider the valuation of a common stock that paid $1.00 dividend at the end of the last year and
is expected to pay a cash dividend in the future. The market price of the stock is $10 and the
floatation cost is 5 % of the market price. Dividends are expected to grow at 10% and the
investors required rate of return is 17%. Calculate the real cost of the stock
The dividend last year was $1. Thus:
Compute the new dividend by: • Kcs = (D1/MP- FC) + g
D1 = D0(1+g) = ($1.10/($10 -$0.50)) + 10%
= $1(1+.10) =____% (Try to calculate on ur own)
=$1.10
Keown, Martin, Petty - Chapter 8 8
 CALCULATION: Valuing Bond
Formula: Yield To Maturity

Keown, Martin, Petty - Chapter 8 9

Example: Yield To Maturity

Consider the bond duration is 20 years. The bond is issued 13 years ago with the
coupon payment of 15 %. The current market price of the bond is now traded at
RM 850. Calculate the value of bond using YTM: (Given tax is 40%)
BEFORE After Tax:
TAX
= 18.53 ( 1 – 0.4)
= 11.19 % AFTER
TAX

Keown, Martin, Petty - Chapter 8 10

EXERCISES / TUTORIAL
CHAPTER 9: LONG TERM FINANCING
 PASY YEAR QUESTION
DEC 2015-3 (b) DEC 2016 - 4 (a)

ANSWER DEC 2015: ANSWER JUN 2016:

i) 7.11 % i) 7.11 %
ii) 6.67 % ii) 9.85 %
iii) 28.46 % iii) 8.24 %

*Choose (ii) = Least Cost *Choose (i) = Least Cost

12
 The End
CHAPTER 9: LONG TERM FINANCING