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    Tutorial Week 13 Questions

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    Logan zheng
    This document contains 8 practice problems related to calculating weighted average cost of capital (WACC). The problems cover topics like calculating the value of preferred stock given its dividend rate and required rate of return, calculating the value of common stock given its dividend growth rate and required rate of return, and calculating WACC given a company's capital structure, costs of debt and equity, and tax rate.

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    Tutorial Week 13 Questions

    Uploaded by

    Logan zheng
    60 views2 pages
    This document contains 8 practice problems related to calculating weighted average cost of capital (WACC). The problems cover topics like calculating the value of preferred stock given its dividend rate and required rate of return, calculating the value of common stock given its dividend growth rate and required rate of return, and calculating WACC given a company's capital structure, costs of debt and equity, and tax rate.

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    uni malaya eia 1009 test

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    This document contains 8 practice problems related to calculating weighted average cost of capital (WACC). The problems cover topics like calculating the value of preferred stock given its dividend rate and required rate of return, calculating the value of common stock given its dividend growth rate and required rate of return, and calculating WACC given a company's capital structure, costs of debt and equity, and tax rate.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    60 views2 pages

    Tutorial Week 13 Questions

    Uploaded by

    Logan zheng
    This document contains 8 practice problems related to calculating weighted average cost of capital (WACC). The problems cover topics like calculating the value of preferred stock given its dividend rate and required rate of return, calculating the value of common stock given its dividend growth rate and required rate of return, and calculating WACC given a company's capital structure, costs of debt and equity, and tax rate.

    Copyright:

    © All Rights Reserved
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    of 2

    Session 2021/2022 – Semester I

    EIA1001 Introduction to Financial Management


    EIA1010 Introduction to Financial Management & Accounting

    Coverage: Lecture Topic 12


    Tutorial: Week 13

    1. Halpert Corporation would like to raise $100,000,000 by issuing preferred stock. The
    preferred stock will have a par value of $1,000 per share and pay a dividend of $48 per
    year. If the required rate of return for this stock is 15 percent. Calculate the value of the
    share.

    2. P. Noel Company's common stock has just paid a $2.00 dividend. If investors believe that
    the expected rate of return on P. Noel is 14% and that dividends will grow at the rate of 5%
    per year for the foreseeable future, what is the value of a share of P. Noel stock?

    3. Frost Corporation's recent earnings per share were $12.90. Their dividend payout ratio is
    20%. Earnings are expected to grow at an average of 6% per year and the company's policy
    is to maintain the same payout ratio. If investors are requiring a 12% rate of return on this
    stock, what will they be willing to pay for one share?

    4. You are considering the purchase of Miller Manufacturing, Inc.'s common stock. The stock
    is selling for $21.00 per share. The next dividend is expected to be $2.10, and you expect
    the dividend to keep growing at a constant rate. If the stock is returning 15%, calculate the
    growth rate of dividends.

    5. Eakins Inc.’s common stock currently sells for $45.00 per share, the company expects to
    earn $2.75 per share during the current year, its expected payout ratio is 70%, and its
    expected constant growth rate is 6%. New stock can be sold to the public at the current
    price, but a flotation cost of 8% would be incurred. By how much would the cost of new
    stock exceed the cost of retained earnings?

    6. Assume Time Warner shares have a market capitalization of $40 billion. The company is
    expected to pay a dividend of $0.25 per share and each share trades for $40. The growth
    rate in dividends is expected to be 7% per year. Also, Time Warner has $20 billion of debt
    that trades with a yield to maturity of 9%. If the firm's tax rate is 40%, what is the WACC?

    7. Assume JUP has debt with a book value of $20 million, trading at 120% of par value. The
    bonds have a yield to maturity of 7%. The firm's book value of equity is $16 million, and
    it has 2 million shares trading at $19 per share. The firm's cost of equity is 12%. What is
    JUP's WACC if the firm's marginal tax rate is 35%?
    8. A firm has determined its optimal capital structure, which is composed of the following
    sources and target market value proportions:

    Debt: The firm can sell a 20-year, $1,000 par value, 9 percent bond for $980. A flotation
    cost of 2 percent of the face value would be required in addition to the discount of $20.
    Preferred Stock: The firm has determined it can issue preferred stock at $65 per share par
    value. The stock will pay an $8.00 annual dividend. The cost of issuing and selling the
    stock is $3 per share.
    Common Stock: The firm's common stock is currently selling for $40 per share. The
    dividend expected to be paid at the end of the coming year is $5.07. Its dividend payments
    have been growing at a constant rate for the last five years. Five years ago, the dividend
    was $3.45. It is expected that to sell, a new common stock issue must be underpriced at $1
    per share and the firm must pay $1 per share in flotation costs. Additionally, the firm's
    marginal tax rate is 40 percent.

    Calculate the firm's weighted average cost of capital assuming the firm has exhausted all
    retained earnings.

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