Question 3 (20 marks) What a disaster your friend Corey Smith is. He did not know how to even begin to answer the previous question that his boss had asked him to do. Corey's unethical behavior during his time in school has now caught up to him. That is why it is important for students to always conduct themselves in an honest and ethical manner, and not look to take short cuts. Students must always try their best and avoid the temptation of cheating on exams. Corey's boss wants to give him one more chance to prove himself, so he gives Corey the following question to answer. Corey has been asked to calculate the weighted average cost of capital (WACC) for an important client (TLC Inc.) of the company. TLC has a debt to equity ratio of fifty percent, and a tax rate of forty percent. TLC has twenty- year bonds that have been issued seven years ago. The bonds were originally issued with a nine percent coupon rate and are presently selling for 108% of face value. TLC Inc. has a beta of 90 and many people in the investment community are projecting a market risk premium of only seven percent. The risk-free rate of interest is presently yielding eight percent. TLC Inc. had just issued a dividend of $1.80 per share and guidance has been provided to the markets that the dividend is expected to grow at seven percent for the foreseeable future. After checking the market watch web site, we see that the shares of TLC are trading at twenty-five dollars per share. The boss also asks Corey to write a paragraph explaining why using WACC is not always appropriate in evaluating projects. Question 4 (20 marks) Unfortunately, your friend Corey Smith has just been fired. The company discovered that Corey was a fraud. All his cheating and plagiarism have now caught up to him. Corey had constantly misled his professors about how well he understands Managerial Finance. In the real world, he could no longer hide the fact that he was a poor student who never put in the effort to learn the material. He never bought any textbooks and simply attempted to cheat on every exam. You have decided to apply for Corey's job. Being an honest and ethical student, you understand the importance of conducting yourself in an appropriate manner. The boss decides to give you a chance to prove yourself. He wants you to answer the following question. What would the price of Tata Motors stock be if the company paid out dividends of one hundred and twenty-six thousand dollars, has an outstanding float of one hundred thousand common shares, has a return on equity of twenty five percent and earnings per share of four dollars and fifty four cents. The boss wants you to use the Dividend growth model to calculate the price of Tata Motors stock as well as list the advantages and disadvantages of this model. Question 3 (20 marks) What a disaster your friend Corey Smith is. He did not know how to even begin to answer the previous question that his boss had asked him to do. Corey's unethical behavior during his time in school has now caught up to him. That is why it is important for students to always conduct themselves in an honest and ethical manner, and not look to take short cuts. Students must always try their best and avoid the temptation of cheating on exams. Corey's boss wants to give him one more chance to prove himself, so he gives Corey the following question to answer. Corey has been asked to calculate the weighted average cost of capital (WACC) for an important client (TLC Inc.) of the company. TLC has a debt to equity ratio of fifty percent, and a tax rate of forty percent. TLC has twenty- year bonds that have been issued seven years ago. The bonds were originally issued with a nine percent coupon rate and are presently selling for 108% of face value. TLC Inc. has a beta of 90 and many people in the investment community are projecting a market risk premium of only seven percent. The risk-free rate of interest is presently yielding eight percent. TLC Inc. had just issued a dividend of $1.80 per share and guidance has been provided to the markets that the dividend is expected to grow at seven percent for the foreseeable future. After checking the market watch web site, we see that the shares of TLC are trading at twenty-five dollars per share. The boss also asks Corey to write a paragraph explaining why using WACC is not always appropriate in evaluating projects. Question 4 (20 marks) Unfortunately, your friend Corey Smith has just been fired. The company discovered that Corey was a fraud. All his cheating and plagiarism have now caught up to him. Corey had constantly misled his professors about how well he understands Managerial Finance. In the real world, he could no longer hide the fact that he was a poor student who never put in the effort to learn the material. He never bought any textbooks and simply attempted to cheat on every exam. You have decided to apply for Corey's job. Being an honest and ethical student, you understand the importance of conducting yourself in an appropriate manner. The boss decides to give you a chance to prove yourself. He wants you to answer the following question. What would the price of Tata Motors stock be if the company paid out dividends of one hundred and twenty-six thousand dollars, has an outstanding float of one hundred thousand common shares, has a return on equity of twenty five percent and earnings per share of four dollars and fifty four cents. The boss wants you to use the Dividend growth model to calculate the price of Tata Motors stock as well as list the advantages and disadvantages of this model
