Finance / July 16, 2018 / Andi Barnett
Fixed costs can be assets like buildings and equipment. For example, a beverage company that bottles water is going to need a physical building and an assembly line that includes specialized equipment. If we assume the building and equipment are leased, there is a monthly payment for each of them. The company is responsible for paying 100% of the monthly payments, whether they produce one case of bottled water or 10,000 cases of bottled water.
Dividends per share and the formula provided may be used by individuals who are evaluating various stocks to invest in and prefer companies who pay dividends. This formula alone does not necessarily provide an overall outlook on a company as some companies retain their earnings for growth instead of paying dividends. A company with a low dividend payout ratio, i.e. a company who pays a smaller percentage of their net income to stockholders, will reinvest their net income which may lead to an increase in the value of the company due to expansion.
The calculation of EV is affected by the assumptions regarding timing of the cash flows within a projection interval. The mid-period convention assumes that the UFCFs occur at the middle of each projection interval, while the end-period convention assumes all UFCFs occur at the end of each interval. In practice, the end-period convention is often used because it is more conservative (the UFCFs are discounted at a time more distant from the present).
Cost of Equity is an important measure for investors who want to invest into a company. The cost of equity is the rate of return investor requires from a stock before looking into other viable opportunities.
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