1. A company just paid a dividend of D₀ = $1 and that dividend is expected to grow at a constant rate of 5% per year in the future. If the required return of the company's shareholders is 13%, what is the company's current stock price using the dividend growth model?

2. A company's dividend growth rate is expected to be 20% in the coming year, drop to 10% from Year 1 to Year 2, and drop to a constant 5% for all subsequent years. The company just paid a dividend of $2 and its stock has a required return of 10%. What is the company's estimated stock price today using the dividend discount model?

3. Assume for a given company that D₁ = $3; P₀ = $100; and g = 3% (constant). Based on the dividend constant growth model approach, what is the company's cost of equity?

4. A company forecasts its free cash flows (in millions) as shown below. If the company's weighted average cost of capital is 12% and the free cash flows are expected to grow at a rate of 4% after Year 2, what is the company's total corporate value, in millions?

Year

1 $-60

2 $100

Free cash flow

5. Assume a company has an outstanding issue of perpetual preferred stock with an annual dividend of $6 per share. If the required return on this preferred stock is 10%, at what price should the preferred stock sell?

6. A firm's target capital structure is 40% debt, 10% preferred stock and 50% common equity. The after-tax cost of debt is 7.5%, the cost of preferred stock is 10% and the cost of common equity is 18%. What is the firm's WACC?

7. Refer to Exhibit 1 below. What is the best estimate for the firm's after-tax cost of debt (to one decimal place, e.g., 5.1%)?

8. Refer to Exhibit 1 below. Based on the CAPM, what is the firm's cost of equity?

9. Refer to Exhibit 1 below. What is the best estimate for the weight of debt to use in calculating the WACC?

10. Refer to Exhibit 1 below. What is the best estimate for the weight of equity to use in calculating the WACC?

Exhibit 1

A firm's abbreviated balance sheet along with additional information are provided below.

Assets

Current Assets

$38,000,000

Net Plant, Property, and Equipment

101,000,000

Total Assets

$139,000,000

Liabilities and Equity

Current Liabilities

$19,000,000

Long-term Debt (40,000 bonds, $1,000 par value)

40,000,000

Total Liabilities

$59,000,000

Common Stock (10,000,000 shares)

30,000,000

Retained Earnings

50,000,000

Total Shareholders' Equity

80,000,000

Total Liabilities and Shareholders' Equity

$139,000,000

The stock is currently selling for $10 per share, and its non-callable $1,000 par value, 20-years until maturity, 7% coupon bonds with semi-annual payments are selling for $925. The stock's beta is 2 and the risk-free rate is 2%. The expected return on the market is 9%. The firm's marginal tax rate is 25%.