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Finance Questions

1) The Joe company is experiencing financial difficulties. Its dividends and earnings are falling at a constant rate of 7% per year. It's stock just paid an annual common stock dividend of $1.50 per share; the stock has a beta of o:45; three-month U.S Treasury Bill rate is 4.8%, and the market risk premium is 7%. What's the value of the Joe Company's Stock.

2) A firm's stock presently sells for $71 per share. The stock just paid a dividend of $2.12. The dividend is anticipated to increase at a constant rate of 5.5% a year. What stock price is anticipated one year from now?

3) A firm has a target capital structure of 30% equity and 70% debt. The firm's tax rate is 35% and the yield to maturity on the firm's outstanding bonds is 8.2%. The firm's weighted average cost of capital is 8.76%. What's the firm's cost of equity capital?

4) A firm has an equity multiplier of 3.71. The firm's assets are financed with some combination of common equity and long-term debt. What's the firm's debt ratio?

5) A company's project has expected net cash inflows of $4,000 per year for seven years. The project has a cost of $12,200 and the cost of capital is 17% What's the project's modified internal rate of return?

6) A project has an upfront cost of $21,300,000. It's estimated that the project will produce the following net cash flows:
Year Project Net Cash Flows
1 $13,000,000
2 $3,000,000
3 $7,200,000

a) What's the project's net present value when the cost of capital is 4%?
b) What's the project's net present value when the cost of capital is 11%

Solution Preview

1) The Joe company is experiencing financial difficulties. Its dividends and earnings are falling at a constant rate of 7% per year. It's stock just paid an annual common stock dividend of $1.50 per share; the stock has a beta of o:45; three-month U.S Treasury Bill rate is 4.8%, and the market risk premium is 7%. What's the value of the Joe Company's Stock.

The value of the stock is calculated as the present value (PV) of all the dividends. We use the constant growth model
Value of Stock = D1/(Ke-g)
D1 is the expected dividend
Ke = cost of equity
g= growth rate in dividends
Here
g = -7% since dividends are falling
We use the CAPM to calculate Ke
Ke = Rf + (Rm-Rf) X beta
Ke = 4.8% + 7%X0.45 = 7.95%
D1 = 1.50 X (1-7%) = 1.395
Value of stock = ...

Solution Summary

The solution has various finance questions relating to stock valuation and capital budgeting

$2.19