. Collect debt and equity amounts for three years from the Annual Reports. While collecting debt and equity information include the elements of debt and equity (for example, paid up/issued capital, retained earnings and reserves for equity, and loans and bonds for debt). Please write zero (0) for any missing element.
2. Calculate cost of common equity either using the dividend growth model or using the security market line (SML) approach. If your company is a dividend paying company, then you can apply the dividend growth model. Otherwise, you can apply the SML approach. You need to collect the input data. Calculate the cost of preferred stocks using the formula available in the slides. If there is no preferred stocks, you do not need to calculate the cost of preferred stocks.
3. Collect the loans, bonds and total long-term debt in terms sources of debt.
4. Calculate the before tax cost of data by dividing the interest expenses (or alternatively financial expenses) by total long-term debt. If you find total interest bearing liabilities, then use total interest bearing liabilities instead of total long-term debt while calculating the before tax cost of debt. Calculate the after tax cost of debt using the formula that you can find in the slides. Please use the tax rate applicable for Australian Corporations. You may use either the marginal tax rate or the effective tax rate.
5. Compute the weighted average cost of capital using the formula available from the slides.
Question 2 on Dividend Policy
1. Report the dividend payments over the last three years: Collect the information from the annual reports. You may find information in other sources like yahoo finance.
2. Calculate the dividend payout and dividend yield: Calculate dividend payout as total dividends paid by the company divided by net income (or dividends per share divided by earnings per share). Compute dividend yield as dividends per share divided by price of a share.
3. Identify a dividend payout policy that the company follows: Discuss different dividend policies. Use the dividend information of the company to identify a dividend policy that your chosen company follows. If you can find the dividend policy that your chosen company follows from any part of the annual reports, you may refer to that.
4. Comment whether the dividend payment of the company is providing a signal to the market:
Examining the signaling effect of dividend announcement or dividend payment
We can address the signaling effect by examining investor reactions surrounding the dividend announcement. Subsequently, we may examine the effect surrounding the dividend payment dates. We can assess price reactions by comparing the market price of shares five days before and five days after surrounding the announcement dates. If there is positive price change following the announcement, we support the positive signaling.
-5 -4 -3 -2 -1 0 +1 +2 +3 +4 +5
In the above diagram, Zero (0) refers to the announcement (or payment) date. Positive one (+1) reflects on one day after the announcement (or payment) and negative one (-1) means one day before the announcement. Similar interpretations hold for other days. Please collect the price data surrounding the announcement or payment of dividend and compare the prices before-and-after announcements or payments. If price increases after announcement compared to the price before announcement, this would mean that investors react positively to dividend announcement.
If price decreases after payment of dividend compared to the price before payment of dividend, this would mean that share price falls after dividend payment.
5. Evaluate the dividend policy of this company in terms of the industry practice: Compare the dividend policy of your selected company with at least one peer (or main competitor).