3. Bob's is a retail chain of specialty hardware stores. The tail chain of specialty hardware storee The firm has 21,000 shares of stock outstanding that are currently $63 per share in the market. Firm's Beta is 1. pos per share in the market. Firm's Beta is 1.2. The risk-free rate is 1% and the market risk premium is so Firm just paid an annual dividend of and an annual dividend of $2.80 per share. Dividend is expected to grow indefinitely at 5% annually. The firm also has 500 coupon bonds outstanding th V coupon bonds outstanding that have a face value of $1,000, a market price of $1,068, 6 years left to maturity and have a current YTM of 5,6%. The corporate tax rate is 35%. 1) Find cost of debt. cost of equity: both CAPM and Dividend Discount/Growth Model can work, but use CAPM here assuming CAPM is a more accurate method for this company. us the appropriate return computed by CAPM into the DDM to assess if the current stock is under-or over- valued? compare cost of debt and cost of equity you computed which number is greater, why is it usually the case? 5) Find weight on debt and weight on equity, and eventually firm's WACC. 1) 5.64 2) 2.0 (1 +0.01 / 63 ) + OS) - 9.677. 3) under valued u) cost of equity is larger and riskier 5) WACC = 10.3421 Bob's, the same firm, is considering expanding by building a new superstore. The superstore will require an initial investment of $12.3 million and is expected to produce cash inflows of $1.3 million annually over its 10-year life. The risks associated with the superstore are comparable to the risks of the firm's current operations. The initial investment will be depreciated on a straight-line basis over the life of the project. At the end of the 10 years, the firm expects to sell the superstore for $6.7 million. Find NPV. Should the firm accept or reject the superstore project and why? The too NPU= -3. 27 million firm should reject the low compared to their supersture project investment ble the NPU is to the SED Today, a Treasury bond dealer is analyzing a 2-yr, 5%, annually paying Treasury coupon security now trading at $1,012.30. He also observes the following treasury security information: 1-yr STRIPS trading at $970.87 (face value $1,000), 2-yr spot rate 4%. 1) Based on the information, is the coupon bond fairly priced, underpriced, overpriced? Can the dealer earn arbitrage profit? 2) What should be the dealer's strategies to earn the profit? + 970.87 100000 0.04 los 1) underpriced, deater can earn profit 2) short sell the strips 3. Bob's is a retail chain of specialty hardware stores. The tail chain of specialty hardware storee The firm has 21,000 shares of stock outstanding that are currently $63 per share in the market. Firm's Beta is 1. pos per share in the market. Firm's Beta is 1.2. The risk-free rate is 1% and the market risk premium is so Firm just paid an annual dividend of and an annual dividend of $2.80 per share. Dividend is expected to grow indefinitely at 5% annually. The firm also has 500 coupon bonds outstanding th V coupon bonds outstanding that have a face value of $1,000, a market price of $1,068, 6 years left to maturity and have a current YTM of 5,6%. The corporate tax rate is 35%. 1) Find cost of debt. cost of equity: both CAPM and Dividend Discount/Growth Model can work, but use CAPM here assuming CAPM is a more accurate method for this company. us the appropriate return computed by CAPM into the DDM to assess if the current stock is under-or over- valued? compare cost of debt and cost of equity you computed which number is greater, why is it usually the case? 5) Find weight on debt and weight on equity, and eventually firm's WACC. 1) 5.64 2) 2.0 (1 +0.01 / 63 ) + OS) - 9.677. 3) under valued u) cost of equity is larger and riskier 5) WACC = 10.3421 Bob's, the same firm, is considering expanding by building a new superstore. The superstore will require an initial investment of $12.3 million and is expected to produce cash inflows of $1.3 million annually over its 10-year life. The risks associated with the superstore are comparable to the risks of the firm's current operations. The initial investment will be depreciated on a straight-line basis over the life of the project. At the end of the 10 years, the firm expects to sell the superstore for $6.7 million. Find NPV. Should the firm accept or reject the superstore project and why? The too NPU= -3. 27 million firm should reject the low compared to their supersture project investment ble the NPU is to the SED Today, a Treasury bond dealer is analyzing a 2-yr, 5%, annually paying Treasury coupon security now trading at $1,012.30. He also observes the following treasury security information: 1-yr STRIPS trading at $970.87 (face value $1,000), 2-yr spot rate 4%. 1) Based on the information, is the coupon bond fairly priced, underpriced, overpriced? Can the dealer earn arbitrage profit? 2) What should be the dealer's strategies to earn the profit? + 970.87 100000 0.04 los 1) underpriced, deater can earn profit 2) short sell the strips