Fin 515 Week 4 Homework Assignment Essay

966 Words Nov 13th, 2012 4 Pages

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.

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
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• c. Interest rate of 13%, tax rate of 35% To calculate, take 0.13*(1-0.35), we get 8.45 percent.

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 5.41 percent.

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.

Cost of Equity: CAPM
Booher Book Stores has a beta of 0.8. The yield on a 3-month T-bill is 4%

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