Question
3. Lawrence Industries' most recent annual dividend was $2.80 per share, and the firm's required return is (4%+ last digit of your ID). Find the
3. Lawrence Industries' most recent annual dividend was $2.80 per share, and the firm's required
return is (4%+ last digit of your ID). Find the market value of Lawrence's shares when:
i. Dividends are expected to grow at 8% annually for 3 years, followed by a 5% constant
annual growth rate in years 4 to infinity.
ii. Dividends are expected to grow at 8% annually for 1
st year, 9% for 2
nd year, 6% for 3
rd year
followed by a 0% constant annual growth rate in years 4 to infinity.
iii. Dividends are expected to grow at 10% constant annual growth rate 4 to infinity.
4. Edna Recording Studios, Inc., reported earnings available to common stock of $4,200,000 last
year. From those earnings, the company paid a dividend of $1.26 on each of its 1,000,000
common shares outstanding. The capital structure of the company includes 40% debt, 10%
preferred stock, and 50% common stock. It is taxed at a rate of 40%.
i. If the market price of the common stock is $40 and dividends are expected to grow at a rate
of (2% +last digit of your ID) per year for the foreseeable future, what is the company's cost of
retained earnings financing?
ii. If underpricing and flotation costs on new shares of common stock amount to $7.00 per share,
what is the company's cost of new common stock financing?
iii. The company can issue $2.00 dividend preferred stock for a market price of $25.00 per
share. Flotation costs would amount to $3.00 per share. What is the cost of preferred stock
financing?
iv. The company can issue $1,000-par-value, (2+ last digit of your ID) coupon, 5-year bonds that
can be sold for $1,200 each. Flotation costs would amount to $25.00 per bond. Use the
estimation formula to figure the approximate cost of debt financing.
v. Calculate the WACC
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