1) A stock that currently trades for $40 per share is expected to pay a year-end dividend of $2 per share. The dividend is expected to grow at a constant rate over time. The stock has a beta of 1.2, the risk-free rate is 5%, and the market risk premium is 5%. What is the stock's expected price seven years from today?

2) Maxvill Motors has annual sales of $15,000. Its variable costs equal 60% of its sales, and its fixed costs equal $1,000. If the company's sales increase 10%, what will be the percentage increase in the company's earnings before interest and taxes (EBIT)?

3) S. Claus & Co. is planning a zero coupon bond issue that has a par value of $1,000 and matures in 2 years. The bonds will be sold today at a price of $826.45. If the firm's marginal tax rate is 40%, what is the annual after-tax cost of debt to the company on this issue?

1) A stock that currently trades for $40 per share is expected to pay a year-end dividend of $2 per share. The dividend is expected to grow at a constant rate over time. The stock has a beta of 1.2, the risk-free rate is 5%, and the market risk premium is 5%. What is the stock's expected price seven years from today?

Step 1: Calculate the required rate of return using CAPM
r= risk free rate + beta x market risk premium = 5% + 1.2 x 5%= 11.00%

Step 2: Calculate the growth rate of dividends using dividend discount model with constant growth

Po= Div1/ (r-g)

Dividend for next year= Div1 = $2.00
Cost of equity= r= 11.00% (calculated)
growth rate of dividends/earnings= g= ? ...

Solution Summary

This solution calculates the answers to three questions in an attached Excel file: stock's expected price, percentage increase in the company's earnings before interest and taxes (EBIT), annual after-tax cost of debt.

Suppose a firm used a debt to leverage up its ROE, and in the process its EPS also was boosted. Would this lead to an increase in the price of the firm's stock?

Determining Optimal Structure
SBC Corp. Has capital structure of 30% debtand 70% equity. The firm current Beta is 1.25, but management wants to understand SBC market risk without effect of leverage. If SBC corp. has a 45% tax rate, what is the unlevered beta.,
A. 0.86
B. 0.96
C. 1.11
D. 1.01
DOM company has current c

Consider the following data:
Percent of capital structure:
Debt 30%
Preferred stock 15
Common equity 55
Additional information:
Bond coupon rate 13%
Bond yield to maturity 11%
Dividend, expected common $3.00
Dividend, preferred $10.00
Price, common $50.00
Price, preferred $98

J. Ross and Sons Inc. has a target capital structure that calls for 40 percent debt, 10 percent preferred stock, and 50 percent common equity. The firm's current before?taxcost of debt is 10 percent, and it can sell as much debt as it wishes at this rate. The firm tax rate is 40 percent. The firm's preferred stock currently s

Heavy Metal Corp is a steel manufacturer that finances its operations with 40% debt, 10% preferred stock, and 50% equity. The interest rate on the company's debt is 11%. The preferred stock pays an annual dividend of $2 and sells for $20 a share. The company's common stock trades at $30 a share, and its current dividend (D0) of

1. Goodwill Corp. has a before-taxcost of debt of 11% and marginal tax rate of 37%. Compute the aftertaxcost of debt?
2. Goodwill Corp. issued preferred stock that has been paying annual dividends of $3.00 and the price of the preferred stock is $34 a share. Compute the cost of Robin's Nest Enterprises preferred stock:

Cost of debtand preferred stock
1. Brandeis Mining Co. has 10-year 8% annual coupon bonds outstanding. The bonds have a current market price of 885.84 and a face value (FV) of 1,000. If Brandeis's marginal tax rate is 35%, what is its relevant after-tax component cost of debt, rd (1-T)?
6.76, 9.85, 5.60 6.40 or 5.79
2

Please help with the following problems.
Jury Company wants to calculate the component costs in its capital structure. Common Stock currently sells for $27, and is expected to pay a dividend of 50 cents.
Jury's dividend growth rate is 8%, and flotation cost is $1.25. Preferred stock sells for $46, and pays a dividend of $5

1) Which one of the following is correct?
-since the cost of debt is generally fixed, increasing the debt ratio tends to stabilize net income.
---When a company increases its debt ratio the costs of equity anddebt both increase. Therefore the WACC must also increase.
----All else equal, an increase in the corporate tax rate