Question
8)Justin Cement Company has had the following pattern of earnings per share over the last five years:
YearEarnings
Per Share 2006$9.00 2007 9.54 2008 10.11 2009 10.72 2010 11.32
The earnings per share have grown at a constant rate (on a rounded basis) and will continue to do so in the future. Dividends represent 40 percent of earnings. a.Project earnings and dividends for the next year (2011). (Round the growth rate to the nearest whole percent. Do not round any other intermediate calculations. Round your answers to 2 decimal places.)
2011 Earnings$ Dividend$
b.If the required rate of return (Ke) is 13 percent, what is the anticipated stock price (P0) at the beginning of 2011? (Round the growth rate to the nearest whole percent. Do not round any other intermediate calculations. Round your answer to 2 decimal places.)
Anticipated stock price$
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Question
7)BioScience Inc. will pay a common stock dividend of $7.20 at the end of the year (D1). The required return on common stock (Ke) is 20 percent. The firm has a constant growth rate (g) of 8 percent.
Compute the current price of the stock (P0). (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Current price$
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Question
6)You are called in as a financial analyst to appraise the bonds of Olsen’s Clothing Stores. The $1,000 par value bonds have a quoted annual interest rate of 8 percent, which is paid semiannually. The yield to maturity on the bonds is 10 percent annual interest. There are 20 years to maturity. Use Appendix B andAppendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.
a.Compute the price of the bonds based on semiannual analysis. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
Bond price$
b.With 15 years to maturity, if yield to maturity goes down substantially to 6 percent, what will be the new price of the bonds? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
New bond price$ rev: 02_11_2015_QC_CS-7555
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Question
23)Northwest Utility Company faces increasing needs for capital. Fortunately, it has an Aa3 credit rating. The corporate tax rate is 35 percent. Northwest’s treasurer is trying to determine the corporation’s current weighted average cost of capital in order to assess the profitability of capital budgeting projects. Historically, the corporation’s earnings and dividends per share have increased about 4.6 percent annually and this should continue in the future. Northwest’s common stock is selling at $69 per share, and the company will pay a $6.20 per share dividend (D1). The company’s $106 preferred stock has been yielding 6 percent in the current market. Flotation costs for the company have been estimated by its investment banker to be $4.00 for preferred stock. The company’s optimum capital structure is 35 percent debt, 10 percent preferred stock, and 55 percent common equity in the form of retained earnings. Refer to the following table on bond issues for comparative yields on bonds of equal risk to Northwest. Data on Bond Issues IssueMoody’s
Rating
PriceYield to Maturity Utilities: Southwest electric power––7 1/4 2023Aa2$920.18 8.66% Pacific bell––7 3/8 2025Aa3 896.25 8.44 Pennsylvania power & light––8 1/2 2022A2 995.66 8.45 Industrials: Johnson & Johnson––6 3/4 2023Aaa 850.24 8.35% Dillard’s Department Stores––7 3/8 2023A2 910.92 8.88 Marriott Corp.––10 2015B2 1,060.10 9.55 a.Compute the cost of debt, Kd (use the accompanying table—relate to the utility bond credit rating for yield.) (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) Cost of debt % b.Compute the cost of preferred stock, Kp. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) Cost of preferred stock % c.Compute the cost of common equity in the form of retained earnings, Ke. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) Cost of common equity % d.Calculate the weighted cost of each source of capital and the weighted average cost of capital. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Weighted Cost Debt (Kd) % Preferred stock (Kp) Common equity (Ke) Weighted average cost of capital (Ka) %
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