# Current Stock Price and Cost of Equity from Retain

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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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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?

$60.07

You have to find the dividend to be paid each year by multiplying the growth rate of 15% for the first two years and 10% for the next year.

D0 = $1.00

D1 = 1.00(1.15) = 1.15

D2 = 1.15(1.15) = 1.3225

D3 = 1.3225(1.10) = 1.4548

Then, you can find the price of the stock at the end of year 2 as follows: -

P = D3 where D3 is the dividend for year 3

(rs - g) rs is the required rate of return

g is the growth rate

P is the current price

P = 1.4548

(0.12 - 0.10)

P = 72.7375

You would need to find the total present value of all dividend paid and the price at the end of year 2 by discounting by its require rate of return.

D1 ...

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This solution is comprised of a detailed explanation to answer what is Connors' current stock price.