Constant Growth Valuation

(7–2) Constant Growth Valuation

Boehm Incorporated is expected to pay a $1.50 per share dividend at the end of this year (i.e., D₁ = $1.50). The dividend is expected to grow at a constant rate of 7% a year. The required rate of return on the stock, r_s, is 15%. What is the value par value of Boehm’s stock?

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(7–4) Preferred Stock Valuation

Nick’s Enchiladas Incorporated has preferred stock outstanding that pays a dividend of $5 at the end of each year. The preferred sells for $50 a share. What is the stock’s required rate of return?

(7–5) Nonconstant Growth Valuation

A company currently pays a dividend of $2 per share (D₀ = $2). It is estimated that the company’s dividend will grow at a rate of 20% per year for the next 2 years, then at a constant rate of 7% thereafter. The company’s stock has a beta of 1.2, the risk-free rate is 7.5%, and the market risk premium is 4%. What is your estimate of the stock’s current price?

(9-2) After-Tax Cost of Debt

LL Incorporated’s currently outstanding 11% coupon bonds have a yield to maturity of 8%. LL believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 35%, what is LL’s after-tax cost of debt?

(9-4) Cost of Preferred Stock with Flotation Costs

Burnwood Tech plans to issue some $60 par preferred stock with a 6% dividend. A similar stock is selling on the market for $70. Burnwood must pay flotation costs of 5% of the issue price. What is the cost of the preferred stock?

(9-5) Cost of Equity: DCF

Summerdahl Resort’s common stock is currently trading at $36 a share. The stock is expected to pay a dividend of $3.00 a share at the end of the year (D₁ = $3.00), and the dividend is expected to grow at a constant rate of 5% a year. What is its cost of common equity?

(9-6) Cost of Equity: CAPM

Booher Book Stores has a beta of 0.8. The yield on a 3-month T-bill is 4% and the yield on a 10-year T-bond is 6%. The market risk premium is 5.5%, and the return on an average stock in the market last year was 15%. What is the estimated cost of common equity using the CAPM?

(9-7) WACC

Shi Importer’s balance sheet shows $300 million in debt, $50 million in preferred stock, and $250 million in total common equity. Shi’s tax rate is 40%, r_d = 6%, r_ps = 5.8%, and r_s = 12%. If Shi has a target capital structure of 30% debt, 5% preferred stock, and 65% common stock, what is its WACC?