Common Stock Valuation and Cost of Capital Case Study - 1

Common Stock Valuation and Cost of Capital - Case Study Example From the above calculations, this stock is selling at $30 that is below $33.50 based on its predictable future cash flows. Therefore, it is undervalued since its selling price is relatively below the intrinsic value. From investments point of view, the company is priced below its true value. For this reason, it is rewarding investing this company’s shares because its stocks have a high probability of appreciating, hence a good investment opportunity that guarantees capital gains. This strategy (value investing strategy) has worked out well for Marquette Inc. given that its portfolio has consistently outperformed others in the broader market. Chief Financial Officers whose stocks are undervalued are less likely to issues them because such companies operate below their true value, thus have to pay more dividends in the future (Clayman, et al., 2012). Second step involves calculation of the cost of equity. With information on cost of debt available, it is possible to apply capital asset pricing model (CAPM) to compute the cost of equity. This is arrived at as follows: The company’s return on assets falls short of its WACC. This is an indication that this company is declining in value. This will scare away potential investors who would preferably invest their resources elsewhere that offer promising returns.The first step is the computation of cost of debt. Cost of debt represents bond’s yield to maturity. From yield to maturity calculator, this value is 7.51%.Therefore, the after-tax cost of debt is equal to 7.51% Ãâ€" (1 – 0.40) = 4.506%.  The second step involves calculation of the cost of equity. With information on the cost of debt available, it is possible to apply capital asset pricing model (CAPM) to compute the cost of equity.The company’s return on assets falls short of its WACC. This is an indication that this company is declining in value. This will scare away potential investors who would preferably invest their resources elsewhere that offer promising returns. Such decline in the value of the firm, there fore, raises concern about the company’s ability to raise capital in the future.