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Flotation Cost and Retained Earnings

1.) Twister Corporation is expected to pay a dividend of $7 per share one year from now on its common stock, which has a current market price of $143. Twister's dividends are expected to grow at 13%.
a) Calculate the cost of the company's retained earnings. Answer: 17.90%
b) If the flotation cost per share of new common stock is $4.00, calculate the cost of issuing new common stock. Answer: 18.04%

2.) Free Willy, Inc. (Nasdaq: FWIC) has a beta of 1.4. If the rate on U.S. Treasury bills is 4.5% and the expected rate of return on the stock market is 12%, what is Free Willy's cost of common equity financing? Answer: 15.00%

3.) Alvin C. York, the founder of York Corporation, thinks that the original capital structure of his company is 30% debt,
15% preferred stock, and thje rest common equity. If the company is in the 40% tax bracket, compute its weighted
average cost of capital given that:
* YTM of its debt is 10%.
* New preferred stock will have a market value of $31, a a dividend of $2 per share, and flotation costs of $1pershare.
* Price of common stock is currently $100 per share, and new common stock can be issued at the same price with flotation costs of $4 per share. The expected dividend in one year is $4 per share, and the growth rate is 6%. Answer: WACC is 8.39%

4.) Three separate projects each have an initial cash outlay of $10,000. The cash flow for Peter's Project is $4,000 per year for 3 years. The cash flow for Paul's project is $2,000 in years 1 and 3, and $8,000 in year 2. Mary's Project has a cash flow of $10,000 in year 1, followed by $1,000 each year for years 2 and 3.
a) Use the payback method to calculate how many years it will take for each project to recoup the initial investment.
Answer: Payback in years is
Initial Cash Flow Cash Flow Cash Flow Payback
Project Investment Year 1 Year 2 Year 3 in Years
Peter $10,000 $4,000 $4,000 $4,000 3
Paul $10,000 $2,000 $8,000 $2,000 2
Mary $10,000 $10,000 $1,000 $1,000 1

b.) Which project would you consider most liquid?
Answer: Mary. State the reason why.

5.) You have just paid $20 million in the secondary market for the winning Powerball lottery ticket, The prize is $2 million at the end of each year for the next 25 years. If your required rate of return is 8%, what is the net present value (NPV)of the deal? Answer: $1.35 million

6.) What is the internal rate of return (IRR) of the Powerball deal in question 5? Answer: 8.78%

7.) What is the modified internal rate of return (MIRR) of the Powerball deal in question 5? Answer: 8.28%

8.) Assume that Intel Corporation's $1,000 face value 9% coupon rate bond matures in 10 years and sells for $1,100. If you purchase the bond for $1,100 and hold it to maturity, what will be your average annual rate of
return on the investment? Answer: 7.54%

9.) China S. Construction, $4 per share dividend, growth rate is 1%, required rate of retrn is 16%.
a) What is the present value of the expected dividends from one share of stock? Answer: $26.67
b.) What is the stock's dividend yield (D1/P0)? Answer: 15.00%

10.)The current price per share of common stock is $15. The expected cash dividend in one year is $2 per share. The constant growth rate is 4%. What is the rate of return on this stock at the current price? Answer: 17.33%

Solution Summary

The solution examines flotation cost and retained earnings for Twister Corporation.

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