Calculate the following problems and provide an overall summary of how companies
ID: 1175389 • Letter: C
Question
Calculate the following problems and provide an overall summary of how companies make financial decisions in no more than 700 words, based on your answers:
Stock Valuation: A stock has an initial price of $100 per share, paid a dividend of $2.00 per share during the year, and had an ending share price of $125. Compute the percentage total return, capital gains yield, and dividend yield.
Total Return: You bought a share of 4% preferred stock for $100 last year. The market price for your stock is now $120. What was your total return for last year?
CAPM: A stock has a beta of 1.20, the expected market rate of return is 12%, and a risk-free rate of 5 percent. What is the expected rate of return of the stock?
WACC: The Corporation has a targeted capital structure of 80% common stock and 20% debt. The cost of equity is 12% and the cost of debt is 7%. The tax rate is 30%. What is the company's weighted average cost of capital (WACC)?
Flotation Costs: Medina Corp. has a debt-equity ratio of .75. The company is considering a new plant that will cost $125 million to build. When the company issues new equity, it incurs a flotation cost of 10%. The flotation cost on new debt is 4%. What is the initial cost of the plant if the company raises all equity externally?
Explanation / Answer
1. Total Return = (Price at the end - Price at the beginning + Any Income Recived)*100/Price at the beginning
Total return = ($125 - $100 + $20)*100 / $100
Total Return = 45%.
Capital Gain Yield = (Price at the end - Price at the beginning)*100/Price at the beginning
Capital Gain Yield = ( $125 - $100)*100 / $100
Capital Gain Yield = 25%.
Dividend Yield = Dividend * 100 / Price at the Beginning
Dividend Yield = $20*100 / $100
Dividend Yield = 20%.
2. Total Return = (Price at the end - Price at the beginning + Any Income Recived)*100/Price at the beginning
Total Return = ($120 - $100 + $4)*100 / $100
Total Return = 24%
Interest is recievd from Preferred stock (4%) = $100 * 4% = $4.
3. Expected Return according to CAPM Model-
Expected Return = Risk Free Return + Beta (Market Risk Return - Risk Free Return)
Expected Return = 5% + 1.20 ( 12% - 5%)
Expected Return = 5% + 8.4%
Expected Return = 13.4%.
4. Wacc -
Cost of debt after tax = 7 * (1-30%)
= 4.9%
If you have any query related to above answer then you can ask in comments.
My first priority is yours satisfaction.
Thanks
Particular Capital Weight Cost after Tax weight * Cost Equity 80% 0.8 12 9.6 Debt 20% 0.2 4.9 0.98 Wacc 10.58Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.