finance presentation slide final.pdf

finance presentation slide final.pdf

• 1.
  NAME ID SAUMIK, MD.ASIKUR RAHMAN 22-92744-3 MD ABIDUL HASAN BHUIYAN 22-92746-3 MD. NAFIZ EKBAL 22-92702-3 JALAL AHAMMAD 22-92780-3 KAZI MUSHFIQUR RAHMAN ALVI 22-92571-2
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  sources of capital Major sources ofcapital Common stock preferred stock Debt (bonds or loans ) Retained Earnings
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  Estimating the costof debt The after-tax cost of borrowing money in the present to finance long-term investments is known as the cost of long-term debt, or Kd. It's common to think that bonds are sold to raise the money out of convenience. The cost of debt = ( risk free rate + risk premium) (1- tax rate). The yield to maturity can be used as an approximation of the cost of debt
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  Floatation Cost • BREBwants to invest 57,794,840,087.98 • 70% will be raised through new equity • 30% will be raised through new debt • Floatation costs on equity are 10% • Floatation costs on debt are 5% Weighted average floatation cost, fA = (E/V) x fE + (D/V) x fD = 0.70 x 0.10 + 0.30 x 0.05 = 0.085 True investment needed = 57,794,840,087.98 / (1-0.085) = 63,163,759,658.995
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  Cost of debt Thecost of debt is the effective rate that a company pays on its debt, such as bonds and loans. Debt is one part of a company's capital structure, with the other being equity. Here, Interest on loan = 9,345,760,826.00 Tax rate = 25% Cost of debt = Interest x (1-Tax rate) = 9,345,760,826.00 x (1-25/100) = 7,009,320,619.5
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  Cost of equity Theequation of cost of equity is Ke = D1 + g P0 D1 = The next period’s dividends g = The growth rate of dividends per period P0 = The current stock price per share The cost of equity is the return that a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm’s cost of equity represents the compensation that the market demands in exchange for owning the asset and bearing the risk of ownership.
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  The cost ofequity can be estimated in two ways: 1. The dividend growth model 2. The capital asset pricing model (CAPM) The Gordon growth model (GGM) is a commonly used version of the dividend discount model (DDM). The GGM is mainly applied to value mature companies that are expected to grow at the same rate forever. Growth Model Item 1 Item 2 Item 3 Item 4 125 100 75 50 25 0
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  Pros And ConsOf The Dividend Growth Model Approach Many times, the growth rate is estimated/forecasted on EPS instead of on dividends. Not all firms pay dividends. While the dividend growth model is easy to use, it is severely dependent upon the quality of growth rate estimates.
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  The steps toestimate the cost of common equity using CAPM Estimate the economy's risk free rate. The risk-free rate is usually the rate of return on government Treasury bills. Estimate the stock market's current rate of return which could be the average return over the past 10 years. Estimate the risk of the stock of the company as compared to the market. This measure is called beta. Capital Asset Pricing Model (CAPM)
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  Pros The model issimple to understand and use. The model does not depend on dividends or growth rates. It can be applied to companies that do not currently pay dividends or are not expected to experience a constant rate of growth in dividends. Cons CAPM does not offer any guidance on the appropriate choice for the risk-free rate. Risk-free rate may vary widely depending on the Treasury security chosen. Estimates of beta can vary widely depending upon the market index and time period chosen. Estimates of market risk premiums will also vary depending on the time period and security chosen.