The company’s common stock is going to pay a dividend is $2.00 per share after one year. Dividends are expected to grow at 10 percent per year for 2 years after that ($2.20 two years from now, and $2.42 3 years from now), and 4% thereafter.
The expected market return is 6%, your stock has a beta of 1.2. The return on riskless government bonds is 2%.
1. Assuming CAPM is correct, what should be the price of the stock?
2. Suppose the market price of the stock is $30 (different from the price that CAPM says it should be), what would you tell the investors about investing in the stock?
Calculate the company’s weighted average cost of capital (WACC) under the following assumptions provided by Sue.
The company’s long-term bonds currently offer a yield to maturity of 8 percent.
The company’s stock price is $50 per share (P0 = $50).
The company recently paid a dividend of $2 per share (D0 = $2.00).
The dividend is expected to grow at a constant rate of 6 percent a year (g = 6%).
The company’s target capital structure is 75 percent equity and 25 percent debt.
The company’s tax rate is 40 percent.
How do we compute the WACC in this circumstance? Why do we need to be concerned with the WACC?
The company can purchase new planning software for $3,600. The software (asset) has a two-year life, will produce a savings of $600 in the first year and $4,200 in the second year.
The discount rate is 15%. Calculate the project's payback and discounted payback period assuming steady cash flows. Also calculate the project's NPV and IRR. Should the project be funded?
In light of the previous information provided, is the 15% discount rate justified. Explain your answer.