F515 Homework Week 4

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Problems (p. 297)
7-2 Constant Growth Valuation
Boehm Incorporated is expected to pay $1.50 per share dividend at the end of this year (i.e., D (1) = $1.50). The dividend is expected to grow at a constant rate of 7% a year. The required rate of return on the stock, r(s), is 15%. What is the value per share of Boehm’s stock? 1.50 / (0.15 – 0.07) = $18.75

7-4 Preferred Stock Valuation
Nick’s Enchiladas Incorporated has preferred stock outstanding that pays a dividend of $5 at the end of each year. The preferred sells for $50 a share. What is the stock’s required rate of return? $5 / $50 = 10%

7-5 Non-constant Growth Valuation
A company currently pays a dividend of $2 per (D0= $2). It is estimated that the company's dividend will grow at a rate of 20% per year for the next 2 years, then at a constant rate of 7% thereafter. The company's stock has a beta of 1.2, the risk free rate is 7.5%, and the market risk is 4%. What is your estimate of the stock's current price? 7.5% + (4%) 1.2 = 12.3%

D0 = $2.00
D1 = $2.00(1.20) = $2.4
D2 = $2.00(1.20)^2 = $2.88
D3 = $2.88(1.07) = $3.08
PVDiv = $2.40/(1.123) + $2.88/(1.123)2
$2.14 + $2.28 = $4.42
P2 = D3/(rs – g) = $3.08/ (0.123 – 0.07) = $58.11
PV = $58.11/ (1.123)^2 = $46.08
P0 = $4.42 + $46.08 = $50.50
Problems (p. 371)

9-2 After-Tax Cost of Debt
LL Incorporated's currently outstanding 11% coupon bonds have a yield to maturity of 8%. LL believes it could issue at par new bonds that would provide a similar yield to maturity. If its marginal tax rate is 35%, what is LL's after-tax cost of debt? 0.08 (0.65) = 5.2%

9-4 Cost of Preferred Stock with Flotation Costs
Burnwood Tech plans to issue some $60 par preferred stock with a 6% dividend. A similar stock is selling on the market for $70. Burnwood must pay flotation costs of 5% of the issue price. What is the cost of the preferred stock? 60 x .06/70(1-0.05)

3.6/66.5
.0541= 5.41%
9-5 Cost of Equity - DCF
Summerdahl Resorts’ common stock is...
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