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Current Price of Stock, WACC

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The last dividend paid by a company was $2.20. Klein's growth rate is expected to be 10 percent for one year, after which dividends are expected to grow at a rate of 6 percent forever. The company's stockholders require a rate of return on equity (rs) of 11 percent. What is the current price of the stock?

a. $44.00
b. $46.64
c. $48.40
d. $48.64
e. $50.40

An analyst has collected the following information regarding Christopher Co.:

? The company's capital structure is 70 percent equity, 30 percent debt.
? The yield to maturity on the company's bonds is 9 percent.
? The company's year-end dividend is forecasted to be $0.80 a share.
? The company expects that its dividend will grow at a constant rate of 9 percent a year.
? The company's stock price is $25.
? The company's tax rate is 40 percent.
? The company anticipates that it will need to raise new common stock this year. Its investment bankers anticipate that the total flotation cost will equal 10 percent of the amount issued. Assume the company accounts for flotation costs by adjusting the cost of capital. Given this information, calculate the company's WACC.

a. 10.41%
b. 12.56%
c. 10.78%
d. 13.55%
e. 9.29%

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The last dividend paid by a company was $2.20.  Klein's growth rate is expected to be 10 percent for one year, after which dividends are expected to grow at a rate of 6 percent forever.  The company's stockholders require a rate of return on equity (rs) of 11 percent.  What is the current price of the stock?

a. $44.00
b. $46.64
c. $48.40
d. $48.64
e. $50.40

Answer: c. $48.40

Div0 = $2.20
Div1 = $2.42 =2.20*(1+10%)
Div2 = $2.5652 =2.42*(1+6%)

P2= Div1/ (r-g)

Dividend for 2nd year= Div2 = $2.5652
Cost of equity= r= 11%
growth rate of ...

Solution Summary

The solution answers 2 questions one relating to Current Price of Stock, the other to WACC

$2.19
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Calculating: current stock price, cost of equity from retained earnings, WACC and more...

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16. The Connors Company's last dividend was $1.00. Its dividend growth rate is expected to be constant at 15% for 2 years, after which dividends are expected to grow at a rate of 10% forever. Connors' required return (rs) is 12%. What is Connors' current stock price?
$54.91
$56.82
$58.15
$60.07
$62.87

17. Assume that Mary Brown Inc. hired you as a consultant to help it estimate the cost of capital. You have been provided with the following data: D0 = $1.20; P0 = $40.00; and g = 7% (constant). Based on the DCF approach, what is Brown's cost of equity from retained earnings?
10.06%
10.21%
10.37%
10.54%
10.68%

18. You were hired as a consultant to Locke Company, and you were provided with the following data: Target capital structure: 40% debt, 10% preferred, and 50% common equity. The interest rate on new debt is 7.5%, the yield on the preferred is 7.0%, the cost of retained earnings is 11.50%, and the tax rate is 40%. The firm will not be issuing any new stock. What is the firm's WACC?
8.25%
8.38%
8.49%
8.61%
8.76%

19. Safeco Company and Risco Inc are identical in size and capital structure. However, the riskiness of their assets and cash flows are somewhat different, resulting in Safeco having a WACC of 10% and Risco a 12% WACC. Safeco is considering Project X, which has an IRR of 10.5% and is of the same risk as a typical Safeco project. Risco is considering Project Y, which has an IRR of 11.5% and is of the same risk as a typical Risco project.
Now assume that the two companies merge and form a new company, Safeco/Risco Inc. Moreover, the new company's market risk is an average of the pre-merger companies' market risks, and the merger has no impact on either the cash flows or the risks of projects X and Y. Which of the following statements is CORRECT?

Safeco/Risco's WACC, as a result of the merger, would be 10%.
If evaluated using the correct post-merger WACC, Project X would have a negative NPV.
After the merger, Safeco/Risco would have a corporate WACC of 11%. Therefore, it should reject Project X but accept Project Y.
If the firm evaluates these projects and all other projects at the new overall corporate WACC, it will become riskier over time.
After the merger, Safeco/Risco should select Project Y but reject Project X.

20. Blanchford Enterprises is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be less than the WACC (and even negative), in which case it will be rejected.
Year: 0 1 2 3
Cash flows: -$1,000 $450 $450 $450

16.20%
16.65%
17.10%
17.55%
18.00%

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