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Required Rate of Return on a Company's Stock

Calculate the required rate of return on a company's stock that has the following characteristics: (a) Constant Growth Rate: 5%, (b) Price: \$50.00, and (c) Dividend (Has Been Paid): \$5.00.

Calculate Company D's weighted average cost of capital, given the following information: (a) Tax Rate: 22%, (b) Average Price of Outstanding Bonds: \$1,280, (c) Coupon Rate (Debt): 7%, (d) NPER (Debt): 10, (e) Dividend: \$4.60, (f) Growth Rate: 6%, (g) Price: \$40.50, (h) Coupon Payments on Preferred Stock: \$4.00, (i) Price of Preferred Stock: \$45.60.00, (j) Debt: \$10,000,000, (k) Equity: \$15,000,000, and (l) Preferred Stock: \$2,000,000.

Solution Preview

We know the formula to determine price of the stock is:
Price = Next Period Dividend/(cost of capital - rate of growth)
=> 50 = 5*(1+.05)/(Cost of capital - .05)
=> 50 = 5.25/(Cost of Capital - .05)
=> Cost of Capital - .05 = 5.25/50
=> Cost of Capital - .05 = .105
=> Cost of Capital = .155 or 15.5%