Question
7)Beasley Ball Bearings paid a dividend of $4 last year. The dividend is expected to grow at a constant rate of 3 percent over the next five years. The required rate of return is 19 percent (this will also serve as the discount rate in this problem). Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.
a.Compute the anticipated value of the dividends for the next four years. (Do not round intermediate calculations. Round your final answers to 2 decimal places.) Anticipated Value D1$ D2$ D3$ D4$
b.Calculate the present value of each of the anticipated dividends at a discount rate of 19 percent. (Do not round intermediate calculations. Round your final answers to 2 decimal places.) PV of Dividends D1$ D2 D3 D4 Total$
c.Compute the price of the stock at the end of the fourth year (P4). (Do not round intermediate calculations. Round your final answer to 2 decimal places.) Stock price at Year 4$
d.Calculate the present value of the year 4 stock price at a discount rate of 19 percent. (Do not round intermediate calculations. Round your final answer to 2 decimal places.) Present value of Year 4 stock price$
e.Compute the current value of the stock. (Do not round intermediate calculations. Round your final answer to 2 decimal places.) Current value$
f.Use the formula given below to show that it will provide approximately the same answer as part e. (Do not round intermediate calculations. Round your final answer to 2 decimal places.) P0=D1Ke − g Current value$ g.If current EPS were equal to $5.15 and the P/E ratio is 1.2 times higher than the industry average of 5, what would the stock price be? (Do not round intermediate calculations. Round your final answer to 2 decimal places.) Stock price$ h.By what dollar amount is the stock price in part g different from the stock price in part f? (Do not round intermediate calculations. Round your final answer to 2 decimal places.) Amount$ i.In regard to the stock price in part f, indicate which direction it would move if: (1) D1 increases(Click to select)Stock price decreasesStock price increases (2) Ke increases(Click to select)Stock price increasesStock price decreases (3) g increases(Click to select)Stock price increasesStock price decreases
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Question
8)Wallace Container Company issued $100 par value preferred stock 10 years ago. The stock provided a 5 percent yield at the time of issue. The preferred stock is now selling for $65. What is the current yield or cost of the preferred stock? (Disregard flotation costs.) (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) Current yield%
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Question
9) Delta Corporation has the following capital structure: Cost
(aftertax)WeightsWeighted
Cost Debt (Kd) 8.6% 10% 0.86% Preferred stock (Kp) 6.8 20 1.36 Common equity (Ke) (retained earnings) 10.2 70 7.14 Weighted average cost of capital (Ka) 9.36% a.If the firm has $49 million in retained earnings, at what size capital structure will the firm run out of retained earnings? (Enter your answer in millions of dollars (e.g., $10 million should be entered as “10”).) Capital structure size (X)$ million
b.The 8.6 percent cost of debt referred to earlier applies only to the first $9 million of debt. After that, the cost of debt will go up. At what size capital structure will there be a change in the cost of debt? (Enter your answer in millions of dollars (e.g., $10 million should be entered as “10”).) Capital structure size (Z)$ million rev: 11_12_2014_QC_58992
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Question
10)The Nolan Corporation finds it is necessary to determine its marginal cost of capital. Nolan’s current capital structure calls for 30 percent debt, 20 percent preferred stock, and 50 percent common equity. Initially, common equity will be in the form of retained earnings (Ke) and then new common stock (Kn). The costs of the various sources of financing are as follows: debt, 9.2 percent; preferred stock, 8 percent; retained earnings, 9 percent; and new common stock, 10.2 percent.
a.What is the initial weighted average cost of capital? (Include debt, preferred stock, and common equity in the form of retained earnings, Ke.) (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) %
b.If the firm has $31 million in retained earnings, at what size capital structure will the firm run out of retained earnings? (Enter your answer in millions of dollars (e.g., $10 million should be entered as “10”).)
Capital structure size (X)$ million
c.What will the marginal cost of capital be immediately after that point? (Equity will remain at 50 percent of the capital structure, but will all be in the form of new common stock, Kn.) (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
Marginal cost of capital %
d.The 9.2 percent cost of debt referred to earlier applies only to the first $9 million of debt. After that, the cost of debt will be 11.2 percent. At what size capital structure will there be a change in the cost of debt? (Enter your answer in millions of dollars (e.g., $10 million should be entered as “10”).)
Capital structure size (Z)$ million
e.What will the marginal cost of capital be immediately after that point? (Consider the facts in both parts cand d.) (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
Marginal cost of capital%
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