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Debt and Common Equity are only used in this company. It can borrow unlimited amounts at an interest rate of 10% as long as it finances at its target capital structure which calls fo 45%debt and 55% common equity. It's last dividend as $2, its expected constant growth rate is 4%, and its common stock sells for $20. The tax rate is 40%. Project A has a rate of return of 13% and Project B has a return of 10%. These two projects are equally risky and about as risky as the firm's assets.
1) What is the company's expected growth rate?
2) If the firm's net income is expected to be $1.1 billion what portion of it's net income is the firm's expected to pay out as dividends?
The text identifies three methods for estimating the cost of common stock from reinvested earnings (not newly issued stock): CAPM method, DCF method, and Bond-yield-plus-risk-premium method. Since we cannot be sure that the estimate obtained with any..
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