FIN515 week4
Complete the
following graded homework assignment in a Word document
named FIN515_Homework4_yourname. Show the details of your calculation and
work in your answer to the problems.
Problems (pp. 303-305)
9-1 Future Value of a
Company
9-4 Dividend Yield and Cost
of Equity Capital
9-5 No Growth Company
9-6 Value of Operations of
Constant Growth
9-7 Expected Growth Rate of
Constant Growth Company
9-12 Non Constant Dividend
9-19 Enterprise Value
Problems (pp. 427–429)
12-1 Equity Cost of Capital
12-3 Higher Equity Cost of
Capital
12-26 Equity Cost of
Capital, Debt Cost of Capital and WACC
1. Assume Evco, Inc., has a current price of $50 and
will pay a $2 dividend in one year, and its equity cost of capital is 15%. What
price must you expect it to sell for right after paying the dividend in one
year in order to justify its current price?
We can use Eq. (9.1) to solve for
the price of the stock in one year given the current price of $50.00, the $2
dividend, and the 15% cost of capital.
4. Krell Industries has a
share price of $22 today. If Krell is expected to pay a dividend of $0.88 this
year, and its stock price is expected to grow to $23.54 at the end of the year,
what is Krell’s dividend yield and equity cost of capital?
5. NoGrowth Corporation currently pays a dividend of $2
per year, and it will continue to pay this dividend forever. What is the price
per share if its equity cost of capital is 15% per year?
6. Summit Systems will
pay a dividend of $1.50 this year. If you expect Summit’s dividend to grow by
6% per year, what is its price per share if its equity cost of capital is 11%?
7. Dorpac Corporation has
a dividend yield of 1.5%. Dorpac’s equity cost of capital is 8%, and its
dividends are expected to grow at a constant rate.
a. What is the expected growth
rate of Dorpac’s dividends?
b. What is the expected growth
rate of Dorpac’s share price?
12. Procter & Gamble
will pay an annual dividend of $0.65 one year from now. Analysts expect this
dividend to grow at 12% per year thereafter until the fifth year. After then,
growth will level off at 2% per year. According to the dividend-discount model,
what is the value of a share of Procter & Gamble stock if the firm’s equity
cost of capital is 8%?
PV of the first 5 dividends:
19. Heavy Metal
Corporation is expected to generate the following free cash flows over the next
five years:
|
Year
|
1
|
2
|
3
|
4
|
5
|
|
FCF ($ millions)
|
53
|
68
|
78
|
75
|
82
|
After then, the free cash flows
are expected to grow at the industry average of 4% per year. Using the
discounted free cash flow model and a weighted average cost of capital of 14%:
a. Estimate the enterprise value
of Heavy Metal.
b. If Heavy Metal has no excess
cash, debt of $300 million and 40 million shares outstanding estimate its share price.
Chapter 12
1. Suppose Pepsico’s stock has a beta of 0.57. If the
risk-free rate is 3% and the expected return of the market portfolio is 8%,
what is Pepsico’s equity cost of capital?
3. Aluminum maker Alcoa has a beta of about 2.0, whereas
Hormel Foods has a beta of 0.45. If the expected excess return of the marker
portfolio is 5%, which of these firms has a higher equity cost of capital, and
how much higher is it?
26. Unida Systems has 40 million shares outstanding
trading for $10 per share. In addition, Unida has $100 million in outstanding
debt. Suppose Unida’s equity cost of capital is 15%, its debt cost of capital
is 8%, and the corporate tax rate is 40%.
a. What is Unida’s unlevered cost
of capital?
b. What is Unida’s after-tax debt
cost of capital?
c. What is Unida’s
weighted average cost of capital?
TUTORIAL PREVIEW
a.
What is Unida’s unlevered cost of capital?
Equity = 40 x $10 = $400
Debt = $100
R u = (400/500) x 15% + (100/500) x 8%
= 13.6%
File name: Fin515 week4 ass.doc File
type: doc PRICE: $25
