1) A stock sells for $20. The next dividend will be $3 per share. If the return
ID: 2706173 • Letter: 1
Question
1)
A stock sells for $20. The next dividend will be $3 per share. If the return on equity ROE is a constant 12% and the company reinvests 50% of earnings in the firm, what must be the opportunity cost of capital? (Do not round intermediate calculations.)
2)
Large Industries bonds sell for $1,132.41. The bond life is 15 years, and the yield to maturity is 7.5%. What must be the coupon rate on the bonds? Assume coupons are paid once a year and the face value is $1,000. (Do not round intermediate calculations. Enter your response as a percentage rounded to one decimal place.)
A stock sells for $20. The next dividend will be $3 per share. If the return on equity ROE is a constant 12% and the company reinvests 50% of earnings in the firm, what must be the opportunity cost of capital? (Do not round intermediate calculations.)
Explanation / Answer
1.growth rate = ROE*(1-payout) =12%*(1-50%)= 6%
P= D1/(r-g)
20 =3/(r-6%)
r= 21%
Cost of Capital = 21.00%
2.let coupon payment be x
1,132.41 = x/(1+7.5%) + x/(1+7.5%)^2 + x/(1+7.5%)^3 ....x/(1+7.5%)^15 + 1000/(1+7.5%)^15
x= 90
Coupon rate = 90/1000 = 9.0%
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