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Finance Problems

1.Parker Corp common stock is currently trading at $30/share. The stock is expected to pay a dividend pf $3.00 per share at the end of the year (D1 = 3.00), and the dividend is expected to grow at a constant rate of 5% a year. If the company were to issue external equity, it would incur a 10 percent floatation cost. What are the cost of internal and external equity?

2. Computers Inc has been presented with an investment opportunity that will yield cash flows of $30,000 per year in Years 1 through 4, 35,000 per year in Years 5 through 9, and $40,000 in Year 10. This investment will cost the firm $150,000 today, and the firm;s cost of capital is 10 percent. Assume cash flows occur evenly during the year, 1/365th each day. What is the payback period for this investment.

3. Island is now in the terminal year of a project. The equipment originally cost $20 million, of which 80% has been depreciated. ABC can sell the used equipment today to another airline for 5 million, and its tax rate is 40%. What is the equipment's after tax net salvage value?

4. The Printer Company will produce 55,000 widgets next year. Variable costs will equal 40 percent of sales, while fixed costs will total $110,000. At what price must each widget be sold for the company to achieve an EBIT if 95,000?

5. Greetings Inc. has a division that makes burlap bags for the citrus industry. The division has fixed costs of $10,000 per month, an it expects to sell 42,000 bags per month. If the variable cost per bag is $2.00 what price must the division charge in order to break even?

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1.Parker Corp common stock is currently trading at $30/share. The stock is expected to pay a dividend pf $3.00 per share at the end of the year (D1 = 3.00), and the dividend is expected to grow at a constant rate of 5% a year. If the company were to issue external equity, it would incur a 10 percent floatation cost. What are the cost of internal and external equity?

The cost of equity using the dividend discount model is given as
Ke = (D1/MP) + g

Where Ke is the cost of equity, D1 is the dividend at the end of year, MP is the market price and g is the growth rate.

In the internal equity, there would be no floatation cost and the market price will be taken as $30, D1=$3 and the g=5%.
Ke internal = 3/30+0.05 =0.1 +0.05 = 15%

For external equity we need to take the floatation cost into account. This would reduce the money available to the company. The company could issue shares at $30 but it would get only 90% of this since the floatation cost is 10%. For external equity, market price to be taken ...

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The solution has various finance problems

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