1)

D&B Hoovers wants to calculate its cost of equity.The company paid a dividend of

$0.40 this year which is growing at 6% annually.It also has a risk premium rate of

7%, WACC = 10%, a terminal FCF growth rate of 8%, and the following expected

free cash flows for the next 3 years:

2020 50

2021 60

2022 75

If D&B Hoovers' current stock price is $12 and its average cost of debt is 4.5%, calculate

Rs using the bond risk premium model.

Rs using the discounted dividend model.

D&B Hoovers cost of equity using bond risk premium?

D&B Hoovers cost of equity using discounted dividend?

2)

D&B Hoovers wants to calculate its cost of equity.The company paid a dividend of

$0.40 this year which is growing at 6% annually.It also has a risk premium rate of

7%, WACC = 10%, a terminal FCF growth rate of 8%, and the following expected

free cash flows for the next 3 years:

2020 50

2021 60

2022 75

D&B Hoovers' current stock price is $12 and its average cost of debt is 4.5%, calculate: Company stock price using the corporate valuation model.

Assume Parvis has 250 shares of common stock outstanding.

D&B Hoovers PV of free cash flows ?

D&B Hoovers intrinsic value of stock ?

If the corporate valuation model is to be believed, is D&B Hoovers stock a good buy?

3)

Electric Co. is considering some options to reduce its WACC.Currently, the company

has $20 million of retained earnings, and $10 million of common stock outstanding, selling

at $40 per share.Electric Co.' expected dividend next year is $1.25, growing at 10% annually.

What is Electric Co.' current WACC?(equity funding, no debt.)

Option 1: sell $5 million of preferred stock.Goldman Bankers has told Electric Co. it believes it can sell Electric Co. shares for $60 per share (100,000 shares) if a dividend of $3.60 is offered.

If Electric Co. chooses this plan, and the shares trade for $60 after the sale.

Electric Co.' cost of preferred stock?

Electric Co. Enterprises WACC?

Option 2: sell $5,567,567 of 10-year bonds.Goldman Bankers has told Electric Co.it believes it

can sell these bonds also, with an annual coupon of 6%.

If Electric Co. chooses this plan, and the bonds trade for 1077.67 after the sale.Their yield to maturity at that time is 5%. Electric Co.' tax rate is 20%.

Electric Co.' aftertax cost of debt ?

Electric Co.' Enterprises WACC:

Which option should Norris pursue?(Using the of concepts of WACC )