Finance 316 practice problems for final exam 8. According to CAPM estimates, what is the cost of equity for a firm with beta of 1.5 when the risk-free interest rate is 6% and the expected return on the market portfolio is 15%? Expected return on stock = 6% + 1.5(15% - 6%) = 6 + 13.5 = 19.5%
9. A firm’s dividend is expected to be $7 next year, and then $9 in the following year. After that, its dividends are expected to grow at an annual rate of 4%. If the firm’s required return on equity is 11%, then what must be its current stock price?
10. Consider two savings accounts that have the same effective annual rate. Account #1 pays 8.8% APR compounded quarterly. Account #2 is compounded monthly. What is Account #2’s APR?
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Therefore, account #2 has an APR of 8.74%.
11. Your firm is thinking about purchasing a coal mining company. Suppose that the mining company’s cash flows are expected to be -$50 million this year, $0 next year, +$20 million per year for the following 15 years, and then nothing after that. You may assume that the expected rate of return on the market portfolio is 15%, the risk-free rate is 4%, and the corporate tax rate is 35%. (a) What is the mining company’s current weighted average cost of capital if it is financed with 25% debt and 75% equity, its equity has a beta of 0.75, and its debt has a beta of 0.1? ( ( ) )
Finance 316 practice problems for final exam (b) Using your answer from part (a), what is the value of the mining company’s equity?
12. Campbell soup currently has a capital structure that consists of 70% equity and 30% debt. Its equity has a beta of 0.5, and its debt has a beta of 0.1. You may assume that the risk-free rate is 5%, the expected return on the market is 12%, and that the corporate tax rate is 40%. Use this information in your answers to questions (a) and (b) below. (a) What is Campbell Soup’s weighted average cost of capital (WACC)? ( ( ) )
(b) You expect Campbell Soup to generate operating cash flows of $750 million per year for three years (starting next year), and then $500 million per year in perpetuity thereafter. Using your answer to (a) above, what is the most you should be willing to pay to...