Homework

FINC_5000

1. Suppose you are given the following data of a public firm with the

following assets:

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The firm has an outstanding bond with 5 years of remaining maturity,

pays 10% coupon, semiannually. The bond is noncallable and is currently

traded for 1,300. The bond has a face value of 1000.

New bonds will

be privately placed with no flotation cost.

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The firm operates in a country where tax rate =30%.

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The firm has outstanding preferred stock that pays 10%, 100 par value,

quarterly dividend, perpetual preferred stock sells for 113.

-

The firm also has common stock currently traded for 100 per share and

pays dividend per share (D0) = 3.5 and dividend is growing by 10% per

annum. The firm's beta (b) = 1.4; risk-free rate (rRF) = 6%; market risk

premium (RPM) = 8%.

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The firm has long-term and steady capital structure policy as follows:

40% debt, 10% preferred, 50% common equity.

Task:

Compute the cost of each asset and construct the weighted average cost of

capital for the underlined firm.

2. Assume the growth of rate dividend payment of a stock is constant at 8%.

The stock currently pays 5.00 per share and its required rate of return is

14%. And the risk free rate of return is 6%. Assume you have 50, 000 in

your bank account that you are contemplating to invest into this stock.

Task

: What would be your total rate of return in three years from this stock?

Show all your computations?