Question
Stock Valuation: A stock has an initial price of $100 per share, paid a dividend of $2.00 per share during the year, and had an
- Stock Valuation: A stock has an initial price of $100 per share, paid a dividend of $2.00 per share during the year, and had an ending share price of $125. Compute the percentage total return, capital gains yield, and dividend yield.
Capital Gains = 125-100 = 25 and Dividend Yield = $2
Total return percent = (25+2)/100 = 27/100 = 27%
Capital Gain return = 25/100 = 25%
Dividend Yield = 2/100 = 2%
- Total Return: You bought a share of 4% preferred stock for $100 last year. The market price for your stock is now $120. What was your total return for last year?
Dividend = 4% of 100 = $4. The capital gain = 120-100 = 20
Total return for last year = $24 = 24%
- CAPM - A stock has a beta of 1.20, the expected market rate of return is 12%, and a risk-free rate of 5 percent. What is the expected rate of return of the stock?
CAPM - Expected return of Stock = Rf + beta*(Rm - Rf) = 5 +1.2*(12-5) = 13.4%
- WACC: The Corporation has a targeted capital structure of 80% common stock and 20% debt. The cost of equity is 12% and the cost of debt is 7%. The tax rate is 30%. What is the company's weighted average cost of capital (WACC)?
We*Re + Wd*Rd*(1-T) = 0.8*12 + 0.2*7*(1-0.3) = 10.58%
- Flotation Costs: Medina Corp. has a debt-equity ratio of .75. The company is considering a new plant that will cost $125 million to build. When the company issues new equity, it incurs a flotation cost of 10%. The flotation cost on new debt is 4%. What is the initial cost of the plant if the company raises all equity externally?
125 million will be raised by issuing both debt and equity so that D/E remains 0.75.
D = 0.75E
E + 0.75E = 125
E = 71.43, D =125- 71.43 = 53.57
Initial cost of the plant will be = 125 + 71.43*0.10 + 53.57*0.04 = 125 + 9.2858 = 134.2858
- Stock Valuation: A stock has an initial price of $100 per share, paid a dividend of $2.00 per share during the year, and had an ending share price of $125. Compute the percentage total return, capital gains yield, and dividend yield.
Capital Gains = 125-100 = 25 and Dividend Yield = $2
Total return percent = (25+2)/100 = 27/100 = 27%
Capital Gain return = 25/100 = 25%
Dividend Yield = 2/100 = 2%
- Total Return: You bought a share of 4% preferred stock for $100 last year. The market price for your stock is now $120. What was your total return for last year?
Dividend = 4% of 100 = $4. The capital gain = 120-100 = 20
Total return for last year = $24 = 24%
- CAPM - A stock has a beta of 1.20, the expected market rate of return is 12%, and a risk-free rate of 5 percent. What is the expected rate of return of the stock?
CAPM - Expected return of Stock = Rf + beta*(Rm - Rf) = 5 +1.2*(12-5) = 13.4%
- WACC: The Corporation has a targeted capital structure of 80% common stock and 20% debt. The cost of equity is 12% and the cost of debt is 7%. The tax rate is 30%. What is the company's weighted average cost of capital (WACC)?
We*Re + Wd*Rd*(1-T) = 0.8*12 + 0.2*7*(1-0.3) = 10.58%
- Flotation Costs: Medina Corp. has a debt-equity ratio of .75. The company is considering a new plant that will cost $125 million to build. When the company issues new equity, it incurs a flotation cost of 10%. The flotation cost on new debt is 4%. What is the initial cost of the plant if the company raises all equity externally?
125 million will be raised by issuing both debt and equity so that D/E remains 0.75.
D = 0.75E
E + 0.75E = 125
E = 71.43, D =125- 71.43 = 53.57
Initial cost of the plant will be = 125 + 71.43*0.10 + 53.57*0.04 = 125 + 9.2858 = 134.2858
Based on the above answers explain how companies make financial decisions
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