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The concepts in the book are based on one of the most important ideas in financial management, the dividend valuation model. This says that the price which shareholders are willing to pay for a security equals the future cash receipts expected to be generated by the security, discounted at the shareholders' required rate of return.
In this book I will do the following:
• State the dividend valuation model and discuss the assumptions it makes.
• Carry out calculations of share price or cost of equity using the dividend valuation model, both with and without tax.
• Estimate future dividend growth rates using the historic growth pattern and the earnings growth model.
• Calculate the cost of irredeemable securities, with and without corporation tax.
• Calculate the cost of securities which are redeemable at the current market price, with and without corporation tax.
• Calculate the cost of securities which are redeemable at other than the current market price, with and without corporation tax.
• Evaluate whether a company should redeem its debt.
• Calculate the cost of convertible debentures and discuss their use as a source of finance.
• Discuss the use of warrants in raising finance.
• Define and calculate the formula values of convertible debt and warrants, and discuss their connection with market prices.
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