Jose David Valderrama #D01228940FIN515 – Managerial Finance Week 4 – Homework June 4, 2013 . is 15%. capital gains yield Exp. rs.50). The dividend is expected to grow at a constant rate of 7% a year. The preferred sells for $50 a share. Tab 7.75 (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. total return 10. What is the value per share of Boehm’s stock? Toolkit Ch7 : Tab 7. we plugged in the numbers above – the result was that rps = 10%.5. D1 = $1.00 $50.00 $50.. The required rate of return on the stock.00 Expected P1 = $50.00 P0 = $50.0% 0.0% 10. What is the stock’s required rate of return? D1 = $5.75 ANSWER: 0 = $18. dividend yield Exp.FIN515 – Week 4 – Homework .50 7% 15% Stock price $18. Rows 6 thru 8.0% =B6/B7 =(B8-B7)/B7 =C10+C11 ANSWER: Using Chapter 7 Toolkit.6 in the excel D1 g rs $1.00 Exp.Guertty Lopez 2 (7–2) Constant Growth Valuation Boehm Incorporated is expected to pay a $1.00 D1 P0 Expected P1 $5.e.50 per share dividend at the end of this year (i. FIN515 – Week 4 – Homework . on toolkit Ch6 Beta Risk-free rate Market risk premium 1.2.30% Now to calculate the stock current’s price.5%.40 Expected P2 $58. What is your estimate of the stock’s current price? Lets calculate required rate of return.2 7.0% Required rate of return 12.Guertty Lopez 3 (7–5) Non-constant Growth Valuation A company currently pays a dividend of $2 per share (D0 = $2). and the market risk premium is 4%. then at a constant rate of 7% thereafter.88 Expected dividends $2.5% 4. the risk-free rate is 7.00 20% 20% 7% 12% Year 1 D1 2 D2 $2. It is estimated that the company’s dividend will grow at a rate of 20% per year for the next 2 years. The company’s stock has a beta of 1.42 . Expect Po in the Excel Ch7 D0 g0 to 1 g1 to 2 gn rs $2.14 PV of expected dividends $4. FIN515 – Week 4 – Homework .53 ANSWER: $50.10 Expected P0 $50. LL believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 35%.53 (9-2) After-Tax Cost of Debt LL Incorporated’s currently outstanding 11% coupon bonds have a yield to maturity of 8%.2% .Guertty Lopez 4 PV of expected P2 $46. what is LL’s after-tax cost of debt? B-T rd = interest rate Tax rate 8% 35% A-T cost of debt = Interest rate x (1 – T) A-T rd = A-T rd = (1 – Tax rate) 65% x x (B-T rd) 8% = 5.200% ANSWER: 5. The stock is expected to pay a dividend of $3. What is its cost of common equity? P0 = D1 = g= $36.41% (9-5) Cost of Equity: DCF Summerdahl Resort’s common stock is currently trading at $36 a share.FIN515 – Week 4 – Homework .0% ANSWER: 13.Guertty Lopez 5 (9-4) Cost of Preferred Stock with Flotation Costs Burnwood Tech plans to issue some $60 par preferred stock with a 6% dividend. Burnwood must pay flotation costs of 5% of the issue price.00).00 $3.3% ÷ ÷ P0 $36.60) rps 5.00 + + g 5.00 5.41% ANSWER: 5.33% .00 a share at the end of the year (D1 = $3. and the dividend is expected to grow at a constant rate of 5% a year. A similar stock is selling on the market for $70. What is the cost of the preferred stock? Preferred stock price Dividend per share Flotation percentage $70 $4 5% (60X6%=3.0% rs = rs = rs = D1 $3.00 13. 8%. and $250 million in total common equity. If Shi has a target capital structure of 30% debt. The yield on a 3-month T-bill is 4% and the yield on a 10-year T-bond is 6%.5% rs 10. What is the estimated cost of common equity using the CAPM? Beta 10-year T-bond yield Market risk premium 0. 5% preferred stock.4% (9-7) WACC Shi Importer’s balance sheet shows $300 million in debt.8. The market risk premium is 5.5%. Shi’s tax rate is 40%.FIN515 – Week 4 – Homework . and rs = 12%. $50 million in preferred stock.Guertty Lopez 6 (9-6) Cost of Equity: CAPM Booher Book Stores has a beta of 0. and 65% common stock. rd = 6%.40% ANSWER: 10.80 6. what is its WACC? . and the return on an average stock in the market last year was 15%.0% 5. rps = 5. 17% .8% 12.Guertty Lopez 7 ANSWER: 9.17% wd wps ws Tax rate rd rps rs WACC 30% 5% 65% 40% 6.FIN515 – Week 4 – Homework .0% 5.0% 9.