FIN 515 WEEK 4 HOMEWORK ASSIGNMENT (7–2) Constant Growth Valuation Boehm Incorporated is expected to pay a $1. 50 per share dividend at the end of this year (i. e. , D1 = $1. 50). The dividend is expected to grow at a constant rate of 7% a year. The required rate of return on the stock, rs, is 15%. What is the value per share of Boehm’s stock? For this problem we can use the formula from the book P=d1(R-G) to find the price. We just need to plug in the values… so, 1. 5/(8% [15-7]). The value is 18. 75. (7–4) Preferred Stock Valuation
Nick’s Enchiladas Incorporated has preferred stock outstanding that pays a dividend of $5 at the end of each year. The preferred sells for $50 a share. What is the stock’s required rate of return? From the book we discover that we simply need to plug into the formula, r=5/50. The required rate of return should be 10 percent. (7–5) Nonconstant Growth Valuation A company currently pays a dividend of $2 per share (D0 = $2). It is estimated that the company’s dividend will grow at a rate of 20% per year for the next 2 years, then at a constant rate of 7% thereafter. The company’s stock has a beta of 1. , the risk-free rate is 7. 5%, and the market risk premium is 4%. What is your estimate of the stock’s current price? I used the financial calculator online for this problem, but we can find it manually… To solve this problem we need to first calculate the required rate of return, which is Rs=Rf+B(Rrm-Rrf), so 7. 5+(11. 5-7. 5)*1. 2=12. 3… So, D0 would be 2, D1 would be 2. 4, D2 would be 2. 88, and D3 would be 3. 08. We then have to calculate the PV for the dividends, which is 4. 42. We have to calculate P2, which came out to 46. 10. After adding up the PV values we get the stock’s price which is 50. 0, or at least that’s what I got… (9-1) After-Tax Cost of Debt Calculate the after-tax cost of debt under each of the following conditions: •a. Interest rate of 13%, tax rate of 0% To calculate, take 0. 13*(1-0), we get 13 percent. •b. Interest rate of 13%, tax rate of 20% To calculate, take 0. 13*(1-0. 20), we get 10. 4 percent. •c. Interest rate of 13%, tax rate of 35% To calculate, take 0. 13*(1-0. 35), we get 8. 45 percent. (9-4) Cost of Preferred Stock with Flotation Costs Burnwood Tech plans to issue some $60 par preferred stock with a 6% dividend. A similar stock is selling on the market for $70.
Burnwood must pay flotation costs of 5% of the issue price. What is the cost of the preferred stock? We’re given the par value, the divident percentage, the market value of the stock, and the flotation costs, and are looking for the cost. The ADP of the preferred stock is 6 percent*60, which comes out to 3. 60. The cost of Preferred Stock can be calculated as (Preferred stock dividend/MP of Preferred Stock*(1-FC)… We just need to plug in the numbers, so you get basically (60*. 06)/70*(1-0. 05)… calculating that out, the cost of preferred stock should be 5. 1 percent. (9-5) Cost of Equity: DCF Summerdahl Resort’s common stock is currently trading at $36 a share. The stock is expected to pay a dividend of $3. 00 a share at the end of the year (D1 = $3. 00), and the dividend is expected to grow at a constant rate of 5% a year. What is its cost of common equity? For this problem, we are to use the equation r=(D1/P0)+g… Since we are given the P0, D1, and G (36,3,0. 05) we are looking for r… so, just plug-and-chug. Comes out to 13. 3 percent. (9-6) Cost of Equity: CAPM Booher Book Stores has a beta of 0. 8.
The yield on a 3-month T-bill is 4% and the yield on a 10-year T-bond is 6%. The market risk premium is 5. 5%, and the return on an average stock in the market last year was 15%. What is the estimated cost of common equity using the CAPM? For this one, looked to me like we need to use the formula Rs=Rrf+Bi(RPm)… Like the last problem, we are given all the values except one. Plugging-and-chugging again, I got 0. 06+0. 8*(0. 055), came out to 10. 4 percent. (9-7) WACC Shi Importer’s balance sheet shows $300 million in debt, $50 million in preferred stock, and $250 million in total common equity.
Shi’s tax rate is 40%, rd = 6%, rps = 5. 8%, and rs = 12%. If Shi has a target capital structure of 30% debt, 5% preferred stock, and 65% common stock, what is its WACC? So, for this problem we need to find the WACC which can be found by the formula (Wd)*(Rd)*(1-T)+(Wps)*(Rps)+(Wce)(Rs)… We are again given most of the values, so it’s plug-and-chug from here on, pretty much. Debt is 0. 30, PS is 0. 05, Equity is 0. 65, Rd is 0. 06, T is 0. 40, Rps is 0. 058, and Rs is 0. 12… So when plugged it looks like: (0. 30*0. 06*(1-0. 40))+0. 05*0. 058+0. 65*0. 12, and that came out to 9. 17 percent.