Finance
questions
1. The corporate treasurer of Gator Electronics
Corporation expects the company to grow at 4% in the future, and assumes debt
securities at 6% interest (tax rate = 30%) to be a cheaper option to finance
the growth. The current market price per share of its common stock is $39, and
the expected dividend in one year is $1.50 per share. Calculate the cost of the
company's retained earnings and check if the treasurer's assumption is correct.
2. The risk-free rate on 10-year U.S. Treasury bills is 3% and the
expected rate of return on the overall stock market is 11%. If Gator Electrics
has a beta of 1.6. What is the cost of equity?
3. A company has a capital structure as follows: Total Assets
$600,000 Debt $300,000 Preferred Stock $100,000 Common Equity $200,000 What
would be the minimum expected return from a new capital investment project to
satisfy the suppliers of the capital? Assume the applicable tax rate is 40%,
interest on debt is 11%, flotation cost per share of preferred stock is $0.75,
and flotation cost per share of common stock is $4. The preferred and common
stocks are selling in the market for $26 and $143 a share respectively, and
they are expected to pay a dividend of $2 and $7, respectively, in one year.
The company's dividends are expected to grow at 13% per year. The firm would
like to maintain the existing capital structure to finance the new project.
Answer: The minimum expected return from a new capital investment project is
the WACC plus any additional risk premium. Since no additional risk is
mentioned, we will use the WACC.
4.
Ajax Manufacturing dividend is $8 per share of common stock in one year. The
dividend growth rate is 3%. Required rate of return is 14%. a) What is the
current market price per share? b) What is the annual rate of return if you
purchase the stock at $65?
a)What
is the current market price per share?
b)
What is the annual rate of return if you purchase the stock at $65?
TUTORIAL
PREVIEW[EXCEL SHEET]
3. A company has a capital structure as follows: Total Assets
$600,000 Debt $300,000 Preferred and so on………………….
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Cost of debt = Interest rate x (1 - Tax
rate)
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Interest rate =
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11%
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Tax Rate =
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40%
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Cost of debt =
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6.60%
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File
name: 4-fin-questions.xls File type: XLS
Price: $10
