Finance: Cost of capital calculations
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1) You are an analyst in a major investment bank and have been assigned the task of determining the share price of Foodmart, a national supermarket chain. The stock beta is 1.286, Rf=3%, Rm=10%. The cost of debt is 6.82%. The tax rate is 34% and the firm is 40% debt financed.
Calculate the WACC for Foodmart. The firm's expected cash flow for this year is $60 million.
After considerable analysis you have concluded that cash flows will grow at 6% per year for 6 years, followed by normal growth of 2% forever. The firm has $300 million in debt and 42 million shares outstanding. Calculate the target price.
2)
South Florida Logistics corp has a stable payout ratio of 25%. Its ROE averages 12%. The cost of equity capital is 10%. It just paid a dividend of $2.00. After two years its dividend/share is expected to be.
3)
XYZ corp has a stable payout ratio of 40%. Last years EPS was $8.40. It expects growth in earnings of 3% forever. K=8%. The price of the stock should be?
4) Bell computers paid $2.70 dividends last year and had growth in dividends of 16% per year over the last few years. It expects growth will decline to a normal growth rate of 4% over a transition period of 6 years. Ke=12%. The stock price should be?
5)General Food Company's latest annual dividend of $2.30 was paid yesterday. You believe the growth rate will be between 4.5% and 5% forever. Your required rate of return is 11%. If the stock is currently selling for $38.50, what should be you investment recommendation?
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Solution Summary
The problem set deals with issues under finance: Cost of capital computation and business valuation.
Education
- B. Sc., University of Nigeria
- M. Sc., London South Bank University
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