Sample problem and solution

Assignment Help Finance Basics
Reference no: EM132185297

Sample Problem and Solution

A company is expected to pay a $3.50 dividend at year-end, the dividends are expected to grow at a constant rate of 6.50% a year, and the common stock currently sells for $62.50 per share. The before-tax cost of debt is 7.50% and the tax rate is 40.00%. The target capital structure consists of 40.00% debt and 60.00% common equity. What is the company's WACC if all equity is from retained earnings?

Solution:

  1. (i) Describe the assumptions related to the problem
  2. The problem assumes the dividends of the company will grow at 6.50% forever and next periods dividend will be $3.50; a tax rate of 40.00% is also assumed for the firm.
  3. (ii) Apply the appropriate mathematical model
  4. The cost of equity is based on the dividend growth model

Reference no: EM132185297

Questions Cloud

Ipo makes economic sense : Under what set of circumstances and exit through an IPO makes economic sense?
Induced and indirect economic impact : What is difference between induced and indirect economic impact?
What is the project expected npv : Assuming a WACC of 9.5%, what is the project's expected NPV (in thousands) after taking into account this growth option? Do not round intermediate calculations.
Calculate the three year sales growth rate : Calculate the three year sales growth rate for Charter Communications.
Sample problem and solution : A company is expected to pay a $3.50 dividend at year-end, the dividends are expected to grow at a constant rate of 6.50% a year, and the common stock currently
Leverage ratios-asset utilization ratios-liquidity ratios : List and define one ratio from each of the following categories: leverage ratios, asset utilization ratios, liquidity ratios, and profitability ratios.
Explain two of the industry classifications : List and explain two of the industry classifications by life cycle.
Shifting of the business cycle : Describe the reaction of cyclical and defensive industries to shifting of the business cycle.
What is the current stock value : Investors require an 18% return on the stocks for the next three years, a 15% return for the following two years and 20% thereafter.

Reviews

Write a Review

 

Finance Basics Questions & Answers

  What are the npv and irr of this project

How should environmental effects be considered when evaluating this, or any other project? How might these affects change your decision in Part b?

  Suppose hockey skates sell in canada for 165 canadian

suppose hockey skates sell in canada for 165 canadian dollars and 1 canadian dollar equals 0.71 u.s. dollars. if

  Capital budget-financial analysis

Can someone please advise me would this be an opportunity cost? How would I account for it in a capital budget/financial analysis?

  How much must hillpeak expected deposit withdrawals be

Hillpeak Savings is projecting a net liquidity surplus of $2 million next week partially as result of expected quality loan demand of $24 million.

  Calculate the expected return of each of the stocks

Calculate the expected return of each of the following stocks. (Do not round intermediate calculations and enter your answers

  Which one would you have the most confidence

One person is your current roommate, the second person is a professional security analyst with an excellent reputation on Wall Street, and the third person is Company Xs CFO. If the three estimates differed, in which one would you have the most confi..

  Find the net community profit

A hospital incurs 10 million dollar of cost to treat Medicaid patients and receives $7 million in payment. Actual charges for these Medicaid patients were 20 million dollar.

  What interest rate does the bond offer

A zero-coupon bond which will pay $1,000 in 10 years is selling today for $ 396.15. What interest rate does the bond offer?

  How much would you have to deposit per month

You plan to deposit$300 per month (at the end of each month) in the account for the first 10 years. How much would you have to deposit per month (at the end of each month) for the last 25 years to reach your goal?

  An entrepreneur has to decide between two possible

an entrepreneur has to decide between two possible investment projects. both projects cost 80.000 upfront. the short

  Which will lower the overall expected return of this stock

A stock is expected to return 13% in a boom, 10% in a normal, and 3% in a recessionary economy. Which will lower the overall expected return of this stock?

  How is the equivalent unit calculation affected

How is the equivalent unit calculation affected when materials are added at the beginning or end of the process rather than uniformly throughout the process?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd