5. Weaver Chocolate Co. expects to earn $3.50 per share during the current year,

Question

5. Weaver Chocolate Co. expects to earn $3.50 per share during the current year, its expected dividend payout ratio is 66%, its expected constant dividend growth rate is 6.0%, and its common stock currently sells for $32.50 per share. New stock can be sold to the public at the current price, but a notation cost of 5%would be incurred. What would be the cost of equity from new common stock? 12.70% 13.37% 14.04% 14.74% 15.48% a. b. C. d. e. gston Labs has an overall (composite) WACC of 10% which reflects the cost of capital lor its average asset. Its assets vary widely in risk, and Langston evaluates low-risk projects with a WACC of es, averagerisk projects at 10%, and high-risk projects at 12%. The company is considering the following projects: Project Bisk Average Low 15% 12% 11% 9% 6% Low Which set of projects would maximize shareholder wealth? a. A and B b. A, B, and C. c. A, B, and D. d- A,B,C,and D. e. A, B, C, D, and E. A and B have the following data. The market risk premium is6.0% and the risk-free rate is 7. Stocks 6.4%, Assuming the stock market isomoont and the socks are in equibrinn, which one otoning statements is CORRECT? 1.10B 7.00% 7.00% 0.90 Beta Constant growth rate a. b. c. d. e. Stock A must have a higher stock price than Stock B Stock A must have a higher dividend yield than Stock B. Stock B's dividend yield equals its expected dividend growth rate. Stock B must have the higher required return. Stock B could have the higher expected return. 8. Goode Inc.'s stock has a required rate of return of 11.50%, and it sels for $25.00 per share. Goode's dividend is expected to grow at a constant rate of 7.00%, what was the last dividend. Do? a. $0.95 b. $1.05 c. $1.16 d. $1.27 e. $1.40

Explanation / Answer

5) EPS = 3.5$ Expeced dividend payout ratio = 65%

D1 = 2.275$

Po = 32.5 - Floatation cost

=32.5-5% = $30.875

g = 6%

Ke= D1/Po + g

= 2.275/30.875 + 0.06

=0.07368 + 0.06

=13.37%

Ans b) 13.37%

6) We need to select project that have higher expected return than WACC

Ans c) A,B and D

7) Let us find Required return

Required return = Rf + b(risk premium)

Stock A =6.4%+1.1(6%)

=13%

Stock B = 6.4% + 0.9(6%)

=11.8%

This indicate that price of Share A is higher than Share b

Ans a) Stock A must have a higher stock price than stock B

8) Let us first find D1

Ke= D1/Po +g

11.5%=D1/25 + 7%

0.115 = D1/25 + 0.07

0.045 = D1/25

D1=1.125$

D1=Do(1+g)

1.125 = Do(1+0.07)

1.125 = Do(1.07)

Do = 1.0514$

Ans b ) $1.05

Project Risk WACC Expected return Whether project should be selected A High 12% 15% yes B Average 10% 12% yes C High 12% 11% no D Low 8% 9% yes E Low 8% 6% no

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