Using the P/E ratio approach to valuation, calculate the value of a share of stock under the following conditions
The investor require rate of return is 13%
The expected level of earning at the end of this year( E1) is $ 4
The firm follow a policy of reteainng 20% of its earning
The return on equity ( ROE) is 15 percent and
Similar shares of stock sell at multiple of 8.000 times per share
Now show that you get the same using the discount dividend model
The stock price using the P/E ratio valuation method is $ ....( round nearest cesnt)
The stock price using the dividend discount model is $ ....( round nearest cent)
2) Your firm is considering a new investment proposal and would like to calculate its weight average cost capital. To help in this compute the cost of capital for the firm for the following.
a. A bond that has a $ 1000 par value( face value) and a contract or coupon interest of 11.9% that is paid semiannually. The bond is currently selling for a piece of $ 1123 and will mature in 10 yrs. The firm tax is 34%.
b) if the firm's bond are not frequently traded how would you go about determine a cost of debt for this company?
c) A new common stock issue that paid a $ 1.75 dividend last year. The par value of the stock is $ 16 and the firm dividends per share grown at a rate of 7.4% per year. This growth rate expected to continue into the forseable future. The price of this stock is now$ 28.35
d) A preferred stock paying a 9.3% dividend on a $ 123 par value. The preferred share are currently selling for $ 151.65
e) a bond selling to yield 12.9% for the purchase of the bond. The borrowing firm faces a tax rate of 34%
A) The after tax cost debt from the firm is ...% ( two decimal places)
B) if the firm bond are not frequently traded who would go about determine a cost of debt for this company?
a) It is standard practice to estimate the cost of debt using the yield maturity on a portfolio of bonds with a similar rating and maturity as the firm outstanding debt.
b) It is standard practice to estimate the cost of debt using the yield maturity on a portfolio of maturity on a treasury bond of the same maturity
c) It is standard practice to estimate the cost of debt using the average coupon rate on a portfolio of bonds with a similar rating and maturity as the firm outstanding debt.
d) It is standard practice to estimate the cost of debt using the bond coupon rate and adjust it for inflation.
c) the cost of common equity for the firms is ...% ( two decilamal places)
d) The cost of preferred stock for the firm is ....% ( two decimal)
e) the after tax cost of debt for the firm is ....( two decimal )
3) Compute the cost of capital for the firm for the following
a) Current bonds with a similar credit rating and maturity as the firms outstanding debt are selling to yield 7.53% while the borroweing firm corporate tax rate is 34%.
b) common stock for a firm that paid a $ 1.07 dividend last year. The dividends are expected to grow at a rate of 5.9% per year into the forseable future. The price of this stock is now $ 25.45
c) A bond that has a $ 1000 par value and a coupon interest rate of 12.8% with interest paid semiannually. New issue will be sell for $ 1149 per bond an mature in 20 yrs. The firm tax rate is 34%
d) A preferred stock paying a dividend of 7.9 on a $ 91 par value. If a new issue is offered the shares would sell for $ 85.94 per share.
a) The tax rate cost of debt for this firm is ...% ( two decimal)
b) The cost of common equity for this firm is ....( two decimal)
c) The after tax cost of debt for this firm is ...( two decimal)
d) The cost of preferred stock for the firm is ...( two decimal)
4) Abe Forrest and three of this friends from college have interest a group of venture capitals in backing their business idea. The proposed operation would consist of a series of retail outlets to distribute and service a full line of vacuum cleaners and accessories. These stores be located in Dalls. To finance the new venture two plans have been proposed.
Plan A is an al common equiry structure in which 2.4 million dollars would be raised by selling $ 90000 shares common stock.
Plan B would involve issuing 1.4 million in long term bonds with an effective interest rate 11.8% plus another 1.0 would raise by selling 45000 shares of common stock. The debt fund raised under Plan B have no fixed maturity date, in that this amount of financial leverage is considered a permanaent part of the firms capital structure.
Abe and his partners planto use a 34% tax rate in their analysis and they have hired you and a consulting basis to do the following.
The EBIT indifference level associated with the two financeial plan is $ ...nearest dollar)
Completer the segment of the income statement for Plan A below( round income statement amounts to the nearest dollar except the EPS to the nearest cent)
Stock plan
EBIT $ ...
Less: Interest expense $ .....
Earning Before taxes $ ...
Less Taxes at 34% $ ....
Net Income $ .....
Numnber of common shares ....
EPS $ ...
Complete the segment of the income statement for plan B below: ( round income statement amounts to the nearest dollar except the EPS to the nearest cent)
Bond stock plan
EBIT $ ...
Less: Interest expense $ .....
Earning Before taxes $ ...
Less Taxes at 34% $ ....
Net Income $ .....
Numnber of common shares ....
EPS $ ...