(a) A share of stock has a dividend of D0 = $5. The dividend is expected to grow at a 20 percent annual

rate for the next 10 years, then at a 15 percent rate for 10 more years, and then at a long-run normal

growth rate of 10 percent forever. If investors require a 10 percent return on this stock, what is its

current price?

(b) The Cristiano Book Production Company has been hit hard due to increased competition. The

company's analysts predict that earnings (and dividends) will decline at a rate of 5 percent annually

forever. Assume that ke = 11 percent and D0 = $2.00. What will be the price of the company's stock

three years from now?

Question # 02:

(a) A firm's cost of capital is influenced by some factors. Evaluate three factors that affect the cost

of capital and that are beyond the firm's control. (Own wording)

(b) Ronaldo Fiber Industries, a fiber optic company is considering to optimize its capital structure. Its

targeted capital structure consists of 20% debt, 30% preferred stocks, and 50% common stocks.

Ronaldo Fiber Industries has been paying dividend 30% of its net income regularly. Current stock

price is Rs. 54, and a constant growth rate is 9%. Metal fiber Industries expecting next year earning

to be Rs. 44,000,000. Last year dividend paid Rs. 3.60 by the company. Corporate tax rate is 40%.

Metal Fiber Industries issued bonds of 12 years with coupon rate of 10% and currently trading at

a price of 945. They are also considering to issue new preferred stock at 11%.

Required:

What is the cost of each of the capital components of Ronaldo Fiber Industries?

What is Ronaldo Fiber Industries' WACC?

Question

Cristiano Limited is interested in acquiring the use of a generator costing Rs. 800,000/-. It has two

options:

1) To borrow the amount at18% per annum repayment in 5 equal annual installment at the end of

each year

OR

2) To take on lease the asset for a period of 5 years at the end of each year of Rs. 175,000/-

The corporation tax rate is 35% and the depreciation is allowed on straight line method. The asset will

have a salvage value of Rs. 180,000 at the end of the 5th year.

Required:

You are required to evaluate each source of financing and advice the company about lease or buy

decision.

(a) Why companies opt for equity fund rather than debt financing?

(b) How shareholder wealth can be maximized? What are the reasons of it?

Question # 05:

The Cristiano Corporation issued a new series of bonds on January 1, 1990. The bonds were sold at par

($1,000), had a 12% coupon, and matured in 30 years on December 31, 2019. Coupon payments are

made semiannually (on June 30 and December 31).

a) What was the YTM on the date the bonds were issued?

b) What was the price of the bonds on January 1, 1995, assuming that interest rates had fallen to

10%?

c) Find the current yield and capital gains yield on January 1, 1995, given the price as

determined in part b.

d) On July 1, 2013, Cristiano's bonds sold for $916.42. What are the YTM, the current yield, and

the capital gains yield for that date?