need help with figuring these questions out on excel/ formulas would be helpful,
ID: 2732266 • Letter: N
Question
need help with figuring these questions out on excel/ formulas would be helpful, The firms EPS in 2016 was $2.15 and in 2009 it was $1.10. The firm’s payout ratio was 45% and the stock is currently valued at $72. Floatation costs for new equity will be 9.5% Net income in 2017 is expected to be $21 million. The Firm’s investment banker estimates that it could sell 20 yr. semiannual bonds with a coupon rate of 7.5%. The face value would be $1000 and the floatation costs for a bond issue would be 4.2%. The market-value weights of the firm’s debt and equity are 40% & 60%, respectively. The firm faces a 39% tax rate.
a) Based on the 7 year track record, what’s the firms EPS growth rate?
b) What would be the dividend in 2017?
c) Calculate the firms cost of retained earnings.
d) Calculate the firms cost of new common equity.
e) What’s the firms after tax cost of new debt?
f) What’s the firms after tax WACC with retained earnings?
g) What’s the firms after tax WACC with new equity?
Explanation / Answer
a) Based on the 7 year track record, the firms EPS growth rate
= EPS 2009 * (1+g)7 = EPS 2016
= $1.1(1+g) = 2.15
= (1+g)7 = 1.95
= (1+g) = 1.1004767
= g = .1004767 or 10% (approx)
b)Dividend in 2017 = dividend in 2016*(1+growth)
= $2.15* 45% *(1+.10)
= $1.06425
c) firms cost of retained earnings = earnings – dividend
= $2.365 – 1.06425
= $1.301
d) Firms cost of new common equity = D1 / P0 + g
= $1.06425/ $72 + .10
= .114781
= 11.48 %
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